By 2025, Digital Transformation And Expansion Into High-Yield Sectors Will Reduce Costs And Boost Stability

Key Takeaways

• Digital transformation and completion of regulatory processes are expected to enhance net margins and operational efficiency by reducing costs significantly.
  
• Strategic expansion in high-yield sectors and diversified deposits aims to increase growth, stability, and improve net interest margins.
  
• Rising costs from regulatory compliance, digital transformation, and business changes may pressure net margins and reduce overall profitability.

Catalysts

Operates as the bank holding company for Metropolitan Commercial Bank that provides a range of business, commercial, and retail banking products and services to small businesses, middle-market enterprises, public entities, and individuals in the New York metropolitan area.

• The ongoing digital transformation initiative is expected to reduce operational costs significantly by the end of 2025, positively impacting net margins and operating leverage.
  
• The company's focus on expanding its loan book by 10-12% in early 2025, with an emphasis on high-yield sectors such as C&I and healthcare, is expected to drive revenue growth.
  
• The wind-down of GPG deposits by year-end 2024 is anticipated to be offset by robust growth across diversified deposit verticals like EB-5, HOA, Municipal, and 1031, supporting both stability in funding costs and net interest margin improvement.
  
• Completion of the regulatory remediation and settlement process in 2024 means non-recurring legal and professional fees will decrease significantly, enhancing earnings and net margins.
  
• Conservative financial assumptions, including anticipated Federal Reserve rate cuts throughout 2025, could lead to net interest margin growth towards 3.75% by year-end 2025, bolstering net interest income.

Metropolitan Bank Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Metropolitan Bank Holding's revenue will grow by 11.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.1% today to 32.4% in 3 years time.
• Analysts expect earnings to reach $116.1 million (and earnings per share of $10.22) by about December 2027, up from $59.8 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 8.8x on those 2027 earnings, down from 11.8x today. This future PE is lower than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 0.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.94%, as per the Simply Wall St company report.

Metropolitan Bank Holding Future Earnings Per Share Growth

Risks

• The pending settlement with a state attorney general and related $10 million reserve create uncertainty and could lead to additional costs, affecting net margins and earnings.
  
• The significant costs associated with regulatory compliance and digital transformation investments, totaling $3.3 million in pretax expenses for the quarter, could increase operational expenses and impact earnings.
  
• The wind down of the GPG business, which contributes $3.5 million in revenue, will lead to a reduction in non-interest income, challenging revenue growth.
  
• The replacement of $700 million low-cost GPG deposits with higher-cost funding sources might compress net interest margin (NIM), impacting profit margins.
  
• Rising expenses related to the build-out of risk management and compliance teams, which have exceeded expectations, could pressure net margins and reduce profitability.

Valuation

• The analysts have a consensus price target of $78.0 for Metropolitan Bank Holding 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 $358.7 million, earnings will come to $116.1 million, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 5.9%.
• Given the current share price of $62.88, the analyst's price target of $78.0 is 19.4% 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.