Shrinking Margins And Lofty Valuations Cast Shadow On Future Earnings Growth

Key Takeaways

• Declining interest rates and loan growth may boost revenue and earnings through expanded net interest margins.
  
• Resolving regulatory issues and nonperforming loans could enhance efficiency and improve net income.
  
• RBB Bancorp's improved regulatory compliance, focus on credit quality, and strategic deposit and loan management may enhance sustainability and profitability.

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.

• The expected decline in short-term market interest rates may lead to an expansion of net interest margin, potentially boosting revenue and earnings.
  
• Anticipated moderate loan growth, supported by strong loan production and hiring more seasoned lenders, could lead to increased revenue.
  
• Resolution of regulatory concerns and focus on compliance may enhance operational efficiency, indirectly improving net margins.
  
• Addressing nonperforming loans with the expectation of resolving the majority by mid-next year could reduce provisions for credit losses, possibly improving net income.
  
• Continued investment in credit quality and relationships aiming for sustainable returns could bolster long-term earnings growth.

RBB Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming RBB Bancorp's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.7% today to 26.4% in 3 years time.
• Analysts expect earnings to reach $35.8 million (and earnings per share of $1.55) by about October 2027, up from $34.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.5x on those 2027 earnings, up from 11.7x today. This future PE is greater than the current PE for the US Banks industry at 11.9x.
• Analysts expect the number of shares outstanding to grow by 9.25% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.37%, as per the Simply Wall St company report.

RBB Bancorp Future Earnings Per Share Growth

Risks

• RBB Bancorp has seen growth in loan production and an increase in deposits, which could support future revenue growth if the trend continues.
  
• The termination of RBB's consent order suggests improved regulatory compliance, which could enhance operational stability and potentially improve net margins by reducing regulatory expenses.
  
• The management's focus on credit quality and prudent loan growth might lead to more sustainable earnings, even in challenging economic conditions.
  
• Reduction in reliance on higher-cost wholesale deposits and expected decrease in deposit costs as interest rates decline could lead to improved net interest margins and profitability.
  
• Opportunities in the loan portfolio, particularly in the SBA and commercial real estate sectors, could drive future revenue growth if market conditions remain favorable.

Valuation

• The analysts have a consensus price target of $23.9 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 2027, revenues will be $135.8 million, earnings will come to $35.8 million, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $22.8, the analyst's price target of $23.9 is 4.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.