MB Financial Beset By Fundamental Concerns; DA Davidson Steps To The Sidelines

MB Financial Inc MBFI is impacted by recent earnings volatility, especially at its mortgage banking business, and challenges in driving core profitability.

The Analyst

DA Davidson analyst Kevin Reevey downgraded shares of MB Financial from Buy to Neutral, and lowered his price target from $48 to $45.

The Thesis

MB Financial's fourth quarter core earnings per share was down 26.4 percent sequentially and 10.2 percent year-over-year, Reevey said in a note. The lower core income, according to the analyst, was due to lower spread income and core fee income, as well as higher non-interest expense.

Compression in net interest margin was responsible for the sequential drop in spread income, the analyst said.

Giving its key takeaways from its call with the management, DA Davidson said the company's balance sheet is well-positioned to benefit from a rising interest rate environment. Additionally, the analyst sees fee income rising about 9 percent in 2018. Core non-interest expenses are expected to be $640 million in 2018, representing a 1 percent year-over-year increase.

As such, the firm lowered its 2018 earnings per share estimates from $2.68 to $2.65, citing lower revised non-interest income and higher credit costs assumptions. However, the firm increased its 2019 earnings per share estimate from $2.99 to $3.08, thanks to the effect of corporate tax reform.

"In our opinion, the shares of MBFI are nearly fully valued," Reevey said.

Price Action

MB Financial shares are down about 7 percent over the past year.

At time of writing, shares were sliding 3 percent to $43.21.