Manhattan Branch May Broaden Prospects, But Rising Expenses Could Compress Margins

Key Takeaways

• Reduction in nonperforming loans and strategic underwriting could improve credit quality and enhance future earnings.
  
• Increased dividends, share buybacks, and strategic growth plans indicate financial stability and potential revenue growth.
  
• Expense management issues, wildfire risks, repricing of deposits, and high payoff activity may burden net margins and limit revenue growth for Preferred Bank.

Catalysts

Provides various commercial banking products and services to small and mid-sized businesses and their owners, entrepreneurs, real estate developers and investors, professionals, and high net worth individuals.

• Reduction in nonperforming and criticized loans suggests potential improvement in credit quality, which could positively impact future earnings and reduce net margins.
  
• Increased dividends and share buybacks indicate confidence in financial stability and shareholder returns, likely enhancing earnings per share.
  
• Strategic treasuries purchases to take advantage of favorable long-term yields could bolster future net interest income and stabilize revenue.
  
• Plans to open a branch in Manhattan may offer new growth opportunities and client acquisition, potentially increasing revenue.
  
• Management's prudent loan underwriting with strong guarantor backing suggests stable credit performance, which may enhance net margins through lower future credit losses.

Preferred Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Preferred Bank's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 47.7% today to 41.6% in 3 years time.
• Analysts expect earnings to reach $130.5 million (and earnings per share of $9.66) by about January 2028, down from $130.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, up from 8.8x today. This future PE is lower than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Preferred Bank Future Earnings Per Share Growth

Risks

• The recent corrections to rental expenses, amounting to $8.1 million over five years, indicate potential oversight in expense management, which could impact net margins.
  
• The impacts of the Los Angeles wildfire may affect the local economy and Preferred Bank’s commercial real estate loans, presenting risks to revenue from potentially impaired assets.
  
• The significant amount of time deposits, $1.6 billion, being subject to repricing at higher rates could influence the bank’s funding costs, potentially compressing net interest margin.
  
• Elevated professional service expenses, particularly legal fees for asset issues, suggest ongoing challenges that may burden net earnings.
  
• Payoff activity is high, reducing the loan portfolio growth opportunity, which affects revenue expansion prospects.

Valuation

• The analysts have a consensus price target of $98.67 for Preferred Bank based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $313.4 million, earnings will come to $130.5 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $87.67, the analyst's price target of $98.67 is 11.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.