Credit & Capital

Square Analysts React to FDIC’s Conditional Banking License Approval

The fintech company began its bid for a banking charter over two years ago.
Lauren MuskettMarch 20, 2020

Payment processing company Square said Wednesday that the Federal Deposit Insurance Corp. voted to conditionally approve its application for an Industrial Loan Company (ILC) bank charter. The company also received charter approval from the Utah Department of Financial Institutions.

The Square Analysts

KeyBanc Capital Markets analyst Josh Beck maintained a buy rating and $90 price target.

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Wedbush analyst Moshe Katri maintained a neutral rating and $75 price target.

Morgan Stanley analyst James Faucette maintained an equal weight rating and $75 price target.

BTIG analyst Mark Palmer upgraded Square from sell to neutral and removed the $34 price target.

The Square Takeaways

The receipt of the conditional approval for an ILC by Square is quite impressive given the difficulty of obtaining a charter, KeyBanc’s Beck said in a Thursday note.

The conditional approval suggests that Square is uniquely positioned to offer a broad suite of financial services such as loans and deposits to small businesses and consumers, which are underserved by the traditional banking system, the analyst said.

Square is likely to benefit from platform breadth, product velocity, customer experience and risk mitigation through direct ownership relative to third-party dependence, he said.

KeyBanc expects the company to pursue an “asset-light” strategy with material financial impact unlikely in 2020.

Beck said he awaits Square’s guidance on potential medium- and long-term financial implications.

The FDIC’s conditional approval is likely to be an important future tool for Square’s ongoing monetization effort, benefiting from its two-sided platform, said Wedbush’s Katri.

“While in theory, this charter provides the company with the ability to expand its lending business, we believe management will likely continue to be vigilant in terms of controlling credit risk exposure, while focusing more on selling financial products,” the analyst said.

Although viewing Wednesday’s news as a positive development, Wedbush expressed concerns over the company’s exposure to physical point-of-sale retailers that is expected to pose near-term risk to its financials.

Wedbush said it would look for more details during Square’s March 24 investor day event.

The ILC is a neutral to positive, Morgan Stanley’s Faucette said.

The ILC will help reduce potential regulatory risk around many new cash app products the company hopes to roll out, reduce capital risk by providing access to FDIC insurance, and open a direct channel of communication to regulators, the analyst said.

Operating a bank will likely be dilutive to returns, he said.

Morgan Stanley expects the suite of offerings to largely be confined to existing offerings for the time being given the macroeconomic conditions, Faucette said.

“We continue to believe that the seller business is likely to enjoy better long-term profitability and valuation,” Faucette said.

Square has lost more than half of its market cap since February 20 due to the coronavirus, BTIG’s Palmer said. Investors fled due to the company’s focus on processing payments and offering ancillary services to small businesses in the pandemic’s path, he said.

“With that said, we believe SQ’s shares now appear much more fairly valued – they trade at 21.6x consensus FY21E EV/EBITDA – such that we would not recommend selling or shorting them at their current level,” the analyst said.

This story originally appeared on Benzinga.

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