Digital Transformation And Innovative Deposits Drive Profit Margin Growth

Key Takeaways

• Strategic deposit initiatives and digital transformation may enhance revenue growth and improve net interest margins while reducing non-interest expenses.
  
• Winding down the GPG business could stabilize net interest margins despite deposit runoff, with diverse deposit verticals supporting future growth.
  
• Increased operational costs from legal issues, expensive funding, and digital transformation could pressure net interest margins and overall earnings amidst economic fluctuations.

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 company expects continued growth in its loan book, supported by branch-light deposit gathering initiatives, which could enhance revenue and net interest margins.
  
• There is an anticipated easing cycle in monetary policy, which may benefit the bank's earnings momentum, potentially leading to improved net margins.
  
• The bank is winding down its GPG business and aims to offset deposit runoff with diverse deposit verticals, likely impacting net interest margin stabilization and future earnings.
  
• Effective digital transformation investments and regulatory remediation are expected to conclude, leading to reduced non-interest expenses, thus positively affecting net margins.
  
• The bank's outlook for its deposit verticals, including EB-5, HOA, Municipal, and 1031, is robust, which may support future growth in deposits and enhance revenue-generating capabilities.

Metropolitan Bank Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Metropolitan Bank Holding's revenue will grow by 13.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.1% today to 30.7% in 3 years time.
• Analysts expect earnings to reach $116.1 million (and earnings per share of $10.22) by about November 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 7.8x on those 2027 earnings, down from 11.8x today. This future PE is lower than the current PE for the US Banks industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.98%, as per the Simply Wall St company report.

Metropolitan Bank Holding Future Earnings Per Share Growth

Risks

• The bank faces ongoing legal and settlement costs related to a fintech relationship terminated in 2020, impacting overall earnings with $10 million in reserves in the third quarter and potentially affecting future net margins.
  
• A significant runoff of GPG deposits, which are being replaced by more expensive funding sources, could pressure the bank's net interest margin, affecting overall earnings.
  
• The bank is incurring substantial expenses related to digital transformation and regulatory remediation, which could elevate operating costs and impact net margins until these projects are completed.
  
• The company may face challenges in maintaining expected net interest margins due to fluctuations in the maturity and repricing of loans and external economic conditions, potentially impacting earnings.
  
• Regulatory cost exposure remains a risk despite recent settlements, as additional requirements or changes could adversely affect operational costs and earnings.

Valuation

• The analysts have a consensus price target of $69.33 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 $378.8 million, earnings will come to $116.1 million, and it would be trading on a PE ratio of 7.8x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of $62.84, the analyst's price target of $69.33 is 9.4% 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.