– Investors misunderstand earnings profile – became just another lending business as non-interest income declined 90% from 2007 peak, with the most significant drop during covid years.
– Way too high valuation – trades at 20x EBIT which is entirely from interest income.
– A squeeze of the competitive environment and discount pressures are killing margins.
– With already tiny 2-4% margins, non-interest income is expected to dip into negative.
– Interest revenue at peak of its yield.
– Set to miss 10% LT growth targets soon and will need to reset expectations.
– Will perform poorly in recession.
– Generously assuming non-interest EBIT of $1.8bn at 15x multiple and loan balance lending EBIT of $6.3bn at 10x multiple, the resulting valuation is $90bn, 30% lower than the current $125bn market cap.
– The realized EBIT on both income streams is likely to be lower, with total normalized EBIT coming under $6bn.
– The non-dramatic bear case at 5x multiple gives a $30bn valuation.
Exp. gain: 75% to $40/share
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