First Horizon's (FHN) restructuring of $4.5 billion in residential loans in Q3 is expected to strengthen the bank's franchise and keep several strategic paths open, including remaining independent, UBS Securities said Thursday in a report.
The move improves the bank's positioning by cleaning up old accounting adjustments tied to the loans, which had made the balance sheet harder for investors or a potential buyer to assess, the report said.
The restructuring reduces the accounting burden for any future acquirer by nearly a third, even though it also lowers the potential takeout value, UBS said. Management also indicated it is no longer interested in pursuing a small acquisition, the report said.
The transaction comes at a cost as UBS estimates roughly 5% tangible book value dilution and an earnback period closer to seven years, assuming loan growth picks up after nearly three years of softness. The restructuring also makes First Horizon more sensitive to rising interest rates and improves loan profitability by about 75 basis points, the firm said.
Pre-provision net revenue in Q3 missed UBS's expectations, and the outlook still depends heavily on deposit pricing, where First Horizon has trailed peers. The bank's more asset-sensitive balance sheet should help over time, though the magnitude of improvement will hinge on how deposit costs evolve, the report said.
UBS maintained its neutral rating on First Horizon stock and its $26 price target.
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