Over the past six months, Butterfield Bank has been a great trade, beating the S&P 500 by 14.9%. Its stock price has climbed to $55.84, representing a healthy 22% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Butterfield Bank, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Butterfield Bank Not Exciting?
Despite the momentum, we're cautious about Butterfield Bank. Here are three reasons we avoid NTB and a stock we'd rather own.
1. Net Interest Income Points to Soft Demand
Our experience and research show the market cares primarily about a bank’s net interest income growth as one-time fees are considered a lower-quality and non-recurring revenue source.
Butterfield Bank’s net interest income has grown at a 3.8% annualized rate over the last five years, much worse than the broader banking industry and in line with its total revenue.
2. Projected Net Interest Income Growth Is Slim
Forecasted net interest income by Wall Street analysts signals a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Butterfield Bank’s net interest income to rise by 1.1%, close to its 1% annualized growth for the past two years.
3. Low Net Interest Margin Reveals Weak Loan Book Profitability
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, we can see that Butterfield Bank’s net interest margin averaged a poor 2.7%, indicating the company has weak loan book economics.
Final Judgment
Butterfield Bank isn’t a terrible business, but it doesn’t pass our bar. With its shares beating the market recently, the stock trades at 1.8× forward P/B (or $55.84 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. We’d suggest looking at one of our top digital advertising picks.
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