Bank Of N.T. Butterfield & Son Has Near-Term Levers

Citi has started coverage of
Bank of N.T. Butterfield & Son Limited (The) Voting Ordinary SharesNTB
with a Buy rating and has a price target of $32, implying a potential upside of 25 percent.

Bullish Justification

The brokerage's bullish thesis on the bank is based on its ability to deliver 20 percent plus ROTE in this current low rate environment, driven by leading market share in its core banking markets (Bermuda and Cayman).

In addition, Citi noted the bank has sustainable attractive pricing, a high return offshore trust business and a favorable tax rate.

"The underlying core growth is modest, but there are levers in the near term to drive double digit EPS growth plus potential to deploy capital for accretive M&A opportunities," analyst Keith Horowitz wrote in a note.

Related Link: Butterfield Shares Open For Trade At $25.10 After IPO Priced At $23.50/Share

Horowitz believes investors misperceive N.T. Butterfield as having higher AML (anti-money laundering) risk as the offshore trust business is generally associated with difficulties in verifying the source of funds and ultimate beneficiaries.

But, the analyst said N.T. Butterfield is not a high-risk story as he believes the offshore trust model is subjected to higher levels of due diligence on clients and their activities relative to other banking activities.

"Also, the minimum asset level needed to start a trust (~$50 million) discourages the 'hot money' that sometimes attempts to use more plain vanilla offshore private bank accounts for money laundering and tax avoidance," Horowitz continued.

Figures And Expectations

The analyst expects EPS of $1.95/$2.70/$3.20 for 2016/2017/2018, respectively.

The stock trades at 8.0x Citi's 2018 EPS estimates versus 11.3x to US bank universe which have significantly lower returns. The $32 target price implies a target P/E multiple of 10.0x on 2018 estimate.

Shares of N.T. Butterfield closed Monday's regular trading session at $25.61.

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Posted In: Analyst ColorLong IdeasNewsPrice TargetInitiationMarketsAnalyst RatingsMoversTrading IdeasCitiKeith Horowitz
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