Eastern Bankshares

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Eastern Bankshares is a bank holding company, primarily operating through its subsidiary Eastern Bank, providing retail and commercial banking, as well as wealth management services across eastern Massachusetts and surrounding areas.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Eastern Bankshares (EBC) operates in a mature and highly competitive industry. It’s core business is the traditional model of banking, which is highly regulated and faces constant competition from other banks, large credit unions, and fintech companies. Therefore its moat will always be limited.

Moat Assessment: 2/5

  • Economic Moat Rating: 2/5
  • Justification: EBC’s moat is limited, primarily due to its operating environment. It does not possess any unique technology or market domination that generates sustainable profits over an extended period of time. Although EBC’s focus on the local market and long history give it a certain level of customer stickiness, these aren’t insurmountable barriers to entry that could earn it a wide moat.
    • It has a regional brand reputation that can offer some competitive edge in attracting customers in that specific area, but not any wider moat beyond the local markets.
    • It also benefits from relatively higher switching costs for its commercial customers, but even this is not permanent and competition is fierce in commercial banking as well, with other banks offering attractive pricing. It would be a challenge for competitors to offer the same relationship banking and personalized experience, but not impossible. Therefore we can assign a small/narrow moat.
  • Key Moat Factors: The main advantage would be customer relationships with retail customers and small to medium-sized business customers, it can’t be counted as a structural advantage that other players don’t have, as most banks are making those claims.

Legitimate Risks to the Moat & Business Resilience

  • Interest Rate Risk: Banks are fundamentally exposed to interest rate movements, which affect their net interest income. If short-term interest rates rise faster than long-term rates, as we see in the current market, or if rates turn against EBC’s assets and liabilities, that would drastically shrink margins and profitability. This would lower the value of the business as investors will require a higher return on capital.
  • Credit Risk: Economic downturns or localized job losses in Massachusetts could lead to loan defaults, impacting profitability and asset quality. If local business have to reduce headcount or even close shop, then the bank’s financials will be affected negatively.
  • Competition: The banking industry is intensely competitive. Competitors may offer more lucrative interest rates or better digital banking facilities. As more and more banks invest into technology that provides a better online experience, EBC may be left behind. New fintech companies may disrupt established business by introducing new product and better pricing as well. That means, they will start having competition from companies that weren’t even considered their competitors previously.
  • Regulatory Risk: Changes in banking regulations can lead to increased compliance costs or limitations on growth opportunities. We’ve already seen some regulatory bodies imposing limits on their rates and that is something that can impact EBC’s earnings.
  • Regional Economic Factors: EBC’s performance is closely linked to the regional economy of eastern Massachusetts. Downturns in the regional economy would definitely impact the bank’s profitability.

Business Explanation:

Eastern Bankshares operates as a traditional commercial bank holding company, with the bulk of its business focused on retail and commercial banking services. Here is the revenue distribution by source:

  • Net interest income: This is the revenue the bank earns from loan portfolios, and other interest bearing assets. This has historically formed the largest portion of their revenues. They have a large loan book which contains mostly commercial real estate, residential real estate, and commercial loans.
  • Fee and commission income: This includes income from wealth management, loan origination, trust administration, and other service-related fees.
  • Other income: This includes income from gains or losses on the sale of securities or property.

The financial services industry has some trends that EBC needs to keep in mind:

  • Increasing Competition: The banking landscape is evolving, with traditional banks facing competition from large credit unions, fintech companies, and neobanks.
  • Technological Disruption: Consumers are increasingly relying on digital banking solutions. That means, it is imperative to keep investing into that area.
  • Changing Customer Preferences: Customers now prefer personalized services, transparency, and ease of access. That requires a more customer-focused approach than ever.
  • Regulatory Complexity: The banking industry is heavily regulated, and changes in the regulatory landscape could have far-reaching consequences for these companies.

EBC’s business operates on the principle of taking deposits and offering loans and financial services. The core business is in and around eastern Massachusetts. What sets EBC apart from its competitors is the focus on long-term relationships, which means having loyal customers that have been with EBC for a long time. They also boast a strong local brand reputation. This means, it may be easier for them to attract customers within a niche, but as it’s not a structural advantage and very easily imitable by competition, we can’t categorize as an advantage.

The company’s recent focus, as highlighted in their earnings calls and annual reports, has been on enhancing digital capabilities, growing the commercial banking business, and streamlining their operational processes. EBC’s management seems to have realized that the company is too small for large scale acquisitions or investment, so it has been trying to maintain its margins while improving overall productivity and efficiency.

Financials In-depth:

  • Net Income: EBC’s net income has fluctuated over the past few years, partially due to the interest rate hikes. There is some concern over how much rates will drop in the future and how that might impact profit margins. While they are generating profit on their loans, the interest expenses are increasing at a similar pace, nullifying some of the increase in profits.
  • Loan Growth and Quality: Despite the economic uncertainty, the bank has seen a modest increase in lending volumes. However, some issues such as potential higher losses on nonperforming loans are being monitored carefully by the management.
  • Net Interest Income (NII): NII has improved, owing to higher lending rates, but the increase in funding costs are putting downward pressure on the margin. This highlights the importance of managing the interest rate risk carefully.
  • Capital Position: The bank is generally adequately capitalized for the current operations, and within regulatory requirements. Though the company may need to increase capital further to fulfill regulatory requirements over the next few years.
    • Key Ratios: Ratios such as ROA, ROE, and efficiency ratio paint a picture of its performance, yet they fluctuate depending on the quarter.
  • Dividend: The dividend payments show consistency over the years, but it’s not substantial enough to entice investors that are looking for yield.

Understandability: 2/5

  • Rating: 2/5
  • Justification: The core operations of EBC as a traditional bank are relatively easy to grasp. However, banks are some of the most complicated businesses to value due to the nature of their complex financial statements. Moreover, changes in interest rates, complicated financial instruments that they deal with, regulations, and the interconnectedness with the overall economy increases the complexity. That makes it only suited for investors that are willing to put in the work for researching it.

Balance Sheet Health: 3/5

  • Rating: 3/5
  • Justification: EBC has a decent overall financial standing, yet not without risks. As stated before, their main risk comes from interest rates changes and their loan portfolio. As long as interest rates remain high, it’s likely that the loans will turn profitable. But they are not prepared for a sudden dip in interest rates, as seen historically, which can negatively affect their financial standing.
  • Assets and Liabilities: The bank’s balance sheet is mostly composed of loans, securities, and cash. Liabilities largely consist of customer deposits. While these numbers are in themselves normal, and the levels of capital to assets is within requirements, some volatility still exists.
  • Capital Adequacy: The bank maintains an adequate Tier 1 capital ratio to meet regulatory requirements. But any need to raise capital at a lower price could be detrimental for the existing shareholders.

The banking industry in general is highly unpredictable and volatile. That’s why there is not much possibility of getting a company with a real wide moat.