FBR Initiated Atlantic Capital Bancshares At Market Perform

FBR & Co. has started Atlantic Capital Bancshares Inc (NASDAQ: ACBI) with a Market Perform rating and a price target of $16 per share, saying that it expects the bank's return on equity to trail peers in 2016 as it builds a bank team.

"Based on our current earnings outlook, we do not anticipate equity returns materially improving in 2016 and, thus, do not see an upside earnings catalyst in the near term to materially change share price valuation multiples," analyst Christopher Nolan wrote.

Nolan noted that Atlantic Capital shares currently trade at 1.3x tangible book value versus the 1.4x on average for Southeast bank peers. He stated this is likely due to lower core-equity returns.

The analyst said the challenge for Atlantic Capital is to improve equity returns while sustaining asset quality. For the first quarter, ACBI's operating return on tangible common equity was 5.3 percent versus the "10 percent we estimate for peers."

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"In our view, the primary driver of these low returns has been ACBI's comparatively low loan yields due to a large percentage of legacy Atlantic Capital loans being low-rate variable to high-quality clients and an under-loaned balance sheet," Nolan elaborated.

No Near-Term Equity Returns Improvements

Although these issues can be addressed, the analyst is not expecting improvements to equity returns in 2016, as management is focused on building out its banking team to improve revenue generation, which is likely to begin yielding results in 2017.

Nolan expects operating EPS of $0.67 in 2016 versus $0.62 in 2015 and consensus of $0.66. Atlantic Capital's earnings would be benefited from any rate rise less than 100 bps. Nolan estimates that the December 2015 25-bp rate rise by the Federal Reserve will benefit its annual EPS by $0.03.

Commenting on whether Atlantic Capital could sell itself, Nolan said, "We think ACBI could be an attractive takeout candidate, but we do not expect it to sell itself in the next 24 months."

At the time of writing, shares of ACBI were up 0.29 percent to $13.95.