Even though German American Bancorp (currently trading at $40.45 per share) has gained 6.9% over the last six months, it has lagged the S&P 500’s 13.4% return during that period. This may have investors wondering how to approach the situation.
Find out in our full research report, it’s free for active Edge members.
Why Does GABC Stock Spark Debate?
Founded in 1910 during a wave of community banking expansion in the Midwest, German American Bancorp (NASDAQ:GABC) is a financial holding company that provides banking, wealth management, and insurance services across southern Indiana and Kentucky.
Two Things to Like:
1. Increasing Net Interest Margin Juices Financials
The net interest margin (NIM) is a key profitability indicator that measures the difference between what a bank earns on its loans and what it pays on its deposits. This metric measures how efficiently one can generate income from its core lending activities.
Over the past two years, German American Bancorp’s net interest margin averaged 3.7%, climbing by 35 basis points (100 basis points = 1 percentage point) over that period.
This expansion was a tailwind for its net interest income, and while prevailing interest rates matter the most for industry net interest margins, banks that consistently increase this figure generally boast higher-earning loan books (all else equal such as the risk of those loans) or provide differentiated services that give them the ability to charge higher rates (pricing power).
2. Forecasted Efficiency Ratio Shows Stronger Profits Ahead
Topline growth is certainly important, but the overall profitability of this growth matters for the bottom line. For banks, we look at efficiency ratio, which is non-interest expense (salaries, rent, IT, marketing, excluding interest paid out to depositors) as a percentage of total revenue.
Markets emphasize efficiency ratio trends over static measurements, recognizing that revenue compositions drive different expense bases. Lower efficiency ratios signal superior performance by indicating that banks are controlling costs effectively relative to their income.
For the next 12 months, Wall Street expects German American Bancorp to rein in some of its expenses as it anticipates an efficiency ratio of 51.7% compared to 56.9% over the past year.
One Reason to be Careful:
EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
German American Bancorp’s EPS grew at a weak 5.8% compounded annual growth rate over the last five years, lower than its 10.2% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
German American Bancorp has huge potential even though it has some open questions. With its shares lagging the market recently, the stock trades at 1.3× forward P/B (or $40.45 per share). Is now the time to initiate a position? See for yourself in our full research report, it’s free for active Edge members.
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