Resolving Nonperforming Loans Will Lower Risk In US Banks

Key Takeaways

• Strong loan growth and strategic cost reductions enhance future earnings and drive potential revenue increases in key sectors.
  
• Reducing nonperforming assets and potential stock buybacks could improve net margins and boost earnings per share.
  
• Potential challenges in revenue and earnings stem from increased noninterest expenses, rising credit loss provisions, and weakened asset quality and income diversification.

Catalysts

Operates as the bank holding company for Royal Business Bank that provides various banking products and services to the Chinese-American, Korean-American, and other Asian-American communities.

• RBB Bancorp has seen strong loan growth, with loans held for investment growing by $90 million or 12% annually. The company's continued execution of growth initiatives, particularly in commercial, SBA, and residential mortgage sectors, is likely to drive future revenue increases.
  
• The firm managed to increase its net interest margin by 12 basis points to 2.88% due to strategic deposit cost reductions, enhancing future earnings as margins expand.
  
• RBB Bancorp's efforts in reducing nonperforming assets, along with expected stability in future provisions, suggest potential for improved net margins and earnings as capital tied up in nonperforming loans is redeployed efficiently.
  
• Ongoing resolution of nonperforming loans, along with provisions, points to declining risk and potential for increasing net interest income after provisions, thus potentially improving net margins.
  
• Although not confirmed, the potential implementation of stock buybacks could be leveraged as a catalyst for increasing earnings per share, given the current undervaluation and strong capital ratios.

RBB Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming RBB Bancorp's revenue will grow by 18.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.3% today to 28.5% in 3 years time.
• Analysts expect earnings to reach $46.1 million (and earnings per share of $2.64) by about May 2028, up from $20.9 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 7.1x on those 2028 earnings, down from 13.5x today. This future PE is lower than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 3.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.79%, as per the Simply Wall St company report.

RBB Bancorp Future Earnings Per Share Growth

Risks

• The reduction in nonperforming assets required significant provisions for credit losses, which impacted net income and could continue to strain future earnings if unresolved issues persist.
  
• A recently downgraded $5.3 million New York CRE loan due to tenant vacancy signals potential risks in asset quality, which might affect revenue stability if similar issues arise.
  
• Net interest margin improvement was partially driven by a decrease in deposit costs, but a potential slowdown in deposit cost reduction could limit future net interest income growth.
  
• Noninterest expenses have increased due to seasonal increases and infrastructure costs, which, if not managed, could pressurize net margins and earnings.
  
• The decline in noninterest income, notably from lower gain on sale of loans, poses a risk to revenue diversification, particularly if other noninterest revenue sources do not compensate for this weakness.

Valuation

• The analysts have a consensus price target of $17.9 for RBB Bancorp 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 $162.1 million, earnings will come to $46.1 million, and it would be trading on a PE ratio of 7.1x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $15.94, the analyst price target of $17.9 is 10.9% higher.
  
• 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.