First Horizon Corporation (NYSE:FHN), a prominent financial services company trading at $21.55, has been navigating a complex landscape of challenges and opportunities in recent months. The stock has demonstrated remarkable strength with a 67% return over the past year and currently trades near its 52-week high of $21.72.
Want deeper insights into FHN's performance? InvestingPro subscribers get access to exclusive analysis and 8 additional actionable tips that could shape your investment decision. As the banking sector grapples with evolving interest rate environments and competitive pressures, First Horizon has demonstrated resilience through its diversified business model and strategic initiatives. This comprehensive analysis examines the company's current position, future prospects, and the factors influencing its stock performance.
Financial Performance and Market Position
First Horizon has shown a mixed financial performance in recent quarters, reflecting both the strengths of its business model and the headwinds facing the banking industry. The company currently trades at a P/E ratio of 15.67 and generates annual revenue of $3.04 billion, demonstrating its substantial market presence. According to InvestingPro analysis, the stock appears undervalued based on comprehensive Fair Value calculations. The company's earnings per share (EPS) have been a focal point for analysts, with estimates for the first fiscal year (FY1) ranging from $1.47 to $1.78, and projections for the second fiscal year (FY2) between $1.60 and $1.96. These figures suggest a potential for earnings growth, albeit with some variability in analyst expectations.
One of the key challenges facing First Horizon has been pressure on its net interest income (NII) and net interest margin (NIM). This pressure stems from the current interest rate environment and increased competition for deposits, particularly in the Southeastern United States where the company has a significant presence. Despite these headwinds, First Horizon has managed to partially offset NII challenges through strong fee income performance, particularly in its fixed income business.
The company's market position remains solid, with a market capitalization of approximately $11.3 billion as of January 2025. First Horizon's diversified business model has proven to be a significant asset, allowing it to weather various market conditions and capitalize on different revenue streams. This diversification has been particularly valuable in maintaining revenue stability despite the pressures on traditional banking income sources.
Strategic Initiatives and Growth Opportunities
First Horizon's management has been proactive in implementing strategic initiatives to drive growth and improve profitability. Notably, the company has maintained dividend payments for 14 consecutive years, demonstrating its commitment to shareholder returns. The current dividend yield stands at 2.82%, supported by the company's GOOD Financial Health Score of 2.87 from InvestingPro. One notable development has been the company's securities restructuring, which analysts anticipate will provide an upside to revenue guidance. This restructuring is expected to enhance the company's financial flexibility and potentially improve its competitive position in the market.
Another key focus for First Horizon has been its share buyback program. The company has been actively repurchasing shares, signaling confidence in its intrinsic value and commitment to returning capital to shareholders. While this strategy has been viewed positively by many analysts, it has also led to projections of a decline in the Common Equity Tier 1 (CET1) ratio in 2025 as capital is returned through buybacks.
Analysts have also highlighted the potential for broader bank mergers and acquisitions (M&A) activity, with First Horizon's management expressing optimism about opportunities in this area. M&A could provide a pathway for First Horizon to expand its market presence, achieve economies of scale, and enhance its competitive position in the banking sector.
Operational Efficiency and Cost Management
A bright spot in First Horizon's performance has been its focus on operational efficiency and cost management. Analysts expect positive operating leverage throughout FY25, indicating that the company is effectively managing its expenses relative to revenue growth. This trend towards improved efficiency could lead to increased profitability and better positioning in a competitive market environment.
The company's ability to manage core expenses has been noted as a strength, particularly in the face of revenue pressures. This disciplined approach to cost control has helped First Horizon maintain its financial health and continue investing in strategic initiatives despite challenging market conditions.
Credit Quality and Risk Management
First Horizon's credit quality has remained relatively stable, with analysts noting favorable credit metrics in recent reports. However, there has been an increase in commercial real estate non-performing loans (CRE NPLs), which has drawn attention from investors and analysts alike. While management has indicated that these NPLs have minimal loss content, the situation warrants ongoing monitoring as it could impact the company's risk profile and financial performance.
The overall credit environment for First Horizon appears to be manageable, with the company benefiting from its diversified loan portfolio and risk management practices. The stability in credit quality has been a positive factor in analysts' assessments of the company's financial health and future prospects.
Future Outlook and Market Expectations
Looking ahead, First Horizon's future performance is expected to be influenced by several key factors. Notably, five analysts have recently revised their earnings expectations upward for the upcoming period, suggesting growing confidence in the company's prospects.
Discover the full potential of your investment research with InvestingPro, which offers comprehensive analysis including Fair Value estimates, financial health scores, and expert insights through our detailed Pro Research Report, available for over 1,400 US stocks including FHN. The potential for Federal Reserve interest rate cuts in the latter half of 2024 and into 2025 could have significant implications for the company's NII and overall profitability. Analysts are closely watching for any shifts in monetary policy that could alleviate some of the pressure on First Horizon's interest margins.
The company's focus on fee-based revenue is expected to continue playing a crucial role in offsetting NII challenges. The strength of First Horizon's fixed income business and other fee-generating activities will be important in maintaining revenue stability and growth.
Analysts also anticipate that First Horizon will continue to build core momentum across its operations. The company's strategic initiatives, including its securities restructuring and potential M&A activities, are expected to contribute to long-term growth and value creation for shareholders.
Bear Case
How might increased deposit competition impact FHN's profitability?
The intensifying competition for deposits, particularly in the Southeastern United States, poses a significant challenge to First Horizon's profitability. As banks vie for customer deposits, First Horizon may be forced to offer higher interest rates on deposit products, directly impacting its net interest margin. This pressure on NIM could lead to reduced profitability if the bank is unable to offset these higher costs through other revenue streams or cost-cutting measures.
Moreover, the competitive deposit landscape may limit First Horizon's ability to grow its deposit base cost-effectively. If the bank struggles to attract and retain deposits without significantly increasing its costs, it could face constraints on its lending capacity and overall balance sheet growth. This situation could potentially lead to a slowdown in loan growth or force the bank to rely more heavily on wholesale funding sources, which are typically more expensive and volatile.
What risks does the rise in CRE NPLs pose to FHN's financial stability?
The reported increase in commercial real estate non-performing loans (CRE NPLs) raises concerns about First Horizon's asset quality and potential future credit losses. While management has indicated that these NPLs have minimal loss content, the situation requires careful monitoring. A continued rise in CRE NPLs could signal broader issues within the commercial real estate market or weaknesses in First Horizon's underwriting standards.
If the CRE NPL situation deteriorates, First Horizon may need to increase its loan loss provisions, directly impacting its profitability. Additionally, a higher level of problem loans could lead to increased regulatory scrutiny and potentially require the bank to hold more capital against these assets, limiting its ability to deploy capital for growth initiatives or shareholder returns.
Furthermore, a significant increase in CRE NPLs could damage investor confidence in First Horizon's risk management practices and overall financial stability. This could lead to a higher cost of capital for the bank and potentially impact its stock valuation negatively.
Bull Case
How could potential Fed rate cuts benefit FHN's performance?
Potential Federal Reserve interest rate cuts in the latter half of 2024 and into 2025 could significantly benefit First Horizon's performance. Lower interest rates typically lead to a steeper yield curve, which can improve banks' net interest margins. For First Horizon, this could alleviate some of the pressure on its NII and potentially boost profitability.
Rate cuts could also stimulate economic activity, potentially leading to increased loan demand. This could provide First Horizon with opportunities to grow its loan portfolio and generate additional interest income. Moreover, lower rates might reduce the bank's funding costs more quickly than its asset yields adjust, creating a temporary boost to NIM.
Additionally, a more accommodative monetary policy environment could benefit First Horizon's fee-based businesses, particularly its fixed income operations. Lower rates often lead to increased bond issuance and trading activity, which could drive higher fee income for the bank's capital markets division.
What impact might FHN's strategic initiatives have on long-term growth?
First Horizon's strategic initiatives, including its securities restructuring and focus on operational efficiency, position the company well for long-term growth. The securities restructuring is expected to provide an upside to revenue guidance, potentially enhancing the bank's financial flexibility and improving its ability to navigate changing market conditions.
The company's emphasis on positive operating leverage suggests a commitment to improving efficiency and profitability over time. As First Horizon continues to manage its expenses effectively while growing revenues, it could see expanding profit margins and increased competitiveness in the market.
Furthermore, First Horizon's openness to M&A opportunities could be a significant driver of long-term growth. Strategic acquisitions or mergers could allow the bank to expand its geographic footprint, diversify its revenue streams, and achieve economies of scale. This could lead to enhanced market positioning, improved cost efficiencies, and potentially higher shareholder returns over the long term.
SWOT Analysis
Strengths:
- Diversified business model
- Strong fee income, particularly in fixed income
- Effective cost management and operational efficiency
- Solid credit quality overall
- Active share buyback program
Weaknesses:
- Pressure on net interest income and margins
- Exposure to competitive deposit markets in the Southeast
- Increase in commercial real estate non-performing loans
Opportunities:
- Potential benefits from Federal Reserve rate cuts
- M&A potential in the banking sector
- Upside from securities restructuring
- Continued improvement in operating leverage
Threats:
- Intense deposit competition affecting profitability
- Potential deterioration in commercial real estate market
- Regulatory changes impacting banking operations
- Economic uncertainties affecting loan demand and credit quality
Analysts Targets
- Barclays (LON:BARC): $25.00 (January 17th, 2025)
- RBC Capital Markets: $23.00 (December 11th, 2024)
- Barclays: $23.00 (November 8th, 2024)
- RBC Capital Markets: $20.00 (October 17th, 2024)
- Barclays: $21.00 (October 17th, 2024)
- RBC Capital Markets: $19.00 (July 18th, 2024)
- Barclays: $19.00 (July 18th, 2024)
This analysis is based on information available up to January 17, 2025.
InvestingPro: Smarter Decisions, Better Returns
Gain an edge in your investment decisions with InvestingPro’s in-depth analysis and exclusive insights on FHN. Our Pro platform offers fair value estimates, performance predictions, and risk assessments, along with additional tips and expert analysis. Explore FHN’s full potential at InvestingPro.
Should you invest in FHN right now? Consider this first:
Investing.com’s ProPicks, an AI-driven service trusted by over 130,000 paying members globally, provides easy-to-follow model portfolios designed for wealth accumulation. Curious if FHN is one of these AI-selected gems? Check out our ProPicks platform to find out and take your investment strategy to the next level.
To evaluate FHN further, use InvestingPro’s Fair Value tool for a comprehensive valuation based on various factors. You can also see if FHN appears on our undervalued or overvalued stock lists.
These tools provide a clearer picture of investment opportunities, enabling more informed decisions about where to allocate your funds.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.