Metropolitan Bank Holding: Strong Topline Growth On The Cards

Summary

• A strong pipeline and regional economic factors will likely ensure that loan growth remains at double-digit rates till the end of 2023.
• The rate sensitivity of the net interest margin is moderately high, thanks to sticky deposit costs.
• The December 2022 target price suggests a high upside from the current market price. MCB does not currently pay a dividend.

emptyclouds/E+ via Getty Images

Metropolitan Bank Holding Corporation's (NYSE:MCB) historical high loan growth will likely continue in the next year and a half, thereby pushing up earnings. Sticky deposit costs and excess cash will also help boost the margin amid a rising interest-rate environment, which will further support earnings. Overall, I'm expecting Metropolitan Bank Holding Corp to report earnings of $8.56 per share for 2022, up 33% year-over-year. For 2023, I'm expecting the company to report earnings of $10.15 per share, up 19% year-over-year. The year-end target price suggests a high upside from the current market price. Therefore, I'm adopting a buy rating on Metropolitan Bank Holding Corporation.

Pipelines, Economic Factors Bode Well For Loan Growth

Metropolitan Bank’s loan book has outdone its last couple of years’ performances during the first half of 2022. The loan portfolio grew by 17% in the first half, or 34% annualized. I'm expecting some slowdown in the second half of the year due to high interest rates that will dampen credit appetite.

Nevertheless, loan growth will likely remain at a remarkable level. The management mentioned in the latest conference call that it still has a “very strong pipeline”. Further, economic factors will help loan growth. Metropolitan Bank's loan book is focused on commercial loans, including commercial real estate (“CRE”) and commercial and industrial loans (“C&I”). Therefore, the purchasing managers’ index is a good gauge of credit demand. As seen below, the indices are still in the expansionary territory (above 50) despite the overall GDP decline.

Data by YCharts

MCB operates in the New York metropolitan area, which is currently worse than most other parts of the country in terms of the unemployment rate.

Data by YCharts

Considering the factors mentioned above, I'm expecting loan growth to remain near the level achieved over the last two years. I'm expecting annualized loan growth of 17% per quarter till the end of 2023. Meanwhile, the growth of other balance sheet items will likely trail loan growth. The following table shows my balance sheet estimates.

	FY18	FY19	FY20	FY21	FY22E	FY23E
Financial Position
Net Loans	1,846	2,647	3,102	3,697	4,688	5,485
Growth of Net Loans	31.4%	43.4%	17.2%	19.2%	26.8%	17.0%
Other Earning Assets	283	643	1,138	3,293	2,371	2,468
Deposits	1,661	2,791	3,830	6,436	6,555	7,377
Borrowings and Sub-Debt	230	232	82	114	91	93
Common equity	265	299	341	557	628	741
Book Value Per Share ($)	31.9	35.9	40.6	60.1	56.1	66.3
Tangible BVPS ($)	30.7	34.7	39.4	59.0	55.2	65.4
Source: SEC Filings, Author's Estimates (In USD million unless otherwise specified)

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Several Catalysts Ahead For Margin Expansion

Metropolitan Bank has more fixed than floating-rate loans. Fixed-rate loans made up 56% of total loans, while floating-rate loans made up 44% of total loans at the end of June 2022, as mentioned in the latest earnings presentation. Therefore, the average earning-asset yield is only moderately rate-sensitive.

On the plus side, the average deposit cost is highly sticky. Metropolitan Bank has quickly changed its deposit mix over the last year in anticipation of a rising rate environment.

SEC Filings, Author's Calculations

Non-interest-bearing deposits made up a hefty 56.2% of total deposits at the end of June 2022. These non-interest-bearing deposits will make the average deposit cost upward sticky in a rising rate environment.

Further, despite recent cash deployment, Metropolitan Bank still has a lot of excess cash on its books.

SEC Filings

The excess cash presents an opportunity to lift the margin through the deployment of cash into higher-yielding assets. Even if the management is unsuccessful in improving its asset mix, the excess cash can still earn a higher yield due to the recent movement in the short end of the treasury yield curve.

U.S. Department of the Treasury

The results of the management’s interest-rate sensitivity analysis given in the 10-Q filing show that a 200-basis points hike in interest rates could boost the net interest income by 13.44% over twelve months.

2Q 2022 10-Q Filing

Considering these factors, I'm expecting the margin to increase by 40 basis points in the second half of 2022 before stabilizing in 2023.

Provisioning Likely To Remain At A Normal Level

Metropolitan Bank’s non-performing loans were close to 0.0% of total loans, while allowances were 0.93% of total loans at the end of June 2022. As a result, the provisioning will likely remain subdued in the coming quarters. Further, loans backed by real estate make up a whooping 82% of total loans. Therefore, the loan portfolio carries low credit risk.

The significant loan additions mentioned above will likely be the chief driver of provisioning for expected loan losses. Overall, I'm expecting the provisioning expense to remain at a normal level in the coming quarters. I'm expecting the net provision expense to make up 0.25% of total loans in every quarter till the end of 2023, which is the same as the last five-year average.

Expecting Earnings To Surge By 33% This Year

Earnings of Metropolitan Bank will continue to surge till the end of 2023 thanks to the anticipated increase in loan balances and significant margin expansion. Meanwhile, provisioning will likely remain at a normal level till the end of next year.

Overall, I'm expecting Metropolitan Bank to report earnings of $8.56 per share for 2022, up 33% year-over-year. For 2023, I'm expecting earnings to grow by 19% to $10.15 per share. The following table shows my income statement estimates.

	FY18	FY19	FY20	FY21	FY22E	FY23E
Income Statement
Net interest income	71	98	125	157	230	283
Provision for loan losses	3	4	9	4	12	14
Non-interest income	12	11	17	24	29	29
Non-interest expense	43	60	75	87	107	131
Net income - Common Sh.	25	30	39	60	96	114
EPS - Diluted ($)	3.06	3.56	4.66	6.45	8.56	10.15
Source: SEC Filings, Earnings Releases, Author's Estimates (In USD million unless otherwise specified)

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Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, a stronger or longer-than-anticipated recession can increase the provisioning for expected loan losses beyond my estimates.

High Price Upside Justifies A Buy Rating

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Metropolitan Bank Holding Corp. The stock has traded at an average P/TB ratio of 1.15 in the past, as shown below.

	FY18	FY19	FY20	FY21	Average
T. Book Value per Share ($)	30.7	34.7	39.4	59.0
Average Market Price ($)	44.3	40.0	32.6	68.9
Historical P/TB	1.44x	1.15x	0.83x	1.17x	1.15x
Source: Company Financials, Yahoo Finance, Author's Estimates

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Multiplying the average P/TB multiple with the forecast tangible book value per share of $55.2 gives a target price of $63.4 for the end of 2022. This price target implies a 9.8% downside from the September 2 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

P/TB Multiple	0.95x	1.05x	1.15x	1.25x	1.35x
TBVPS - Dec 2022 ($)	55.2	55.2	55.2	55.2	55.2
Target Price ($)	52.3	57.9	63.4	68.9	74.4
Market Price ($)	70.3	70.3	70.3	70.3	70.3
Upside/(Downside)	(25.5)%	(17.6)%	(9.8)%	(1.9)%	6.0%
Source: Author's Estimates

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The stock has traded at an average P/E ratio of around 10.8x in the past, as shown below.

	FY18	FY19	FY20	FY21	Average
Earnings per Share ($)	3.06	3.56	4.66	6.45
Average Market Price ($)	44.3	40.0	32.6	68.9
Historical P/E	14.5x	11.2x	7.0x	10.7x	10.8x
Source: Company Financials, Yahoo Finance, Author's Estimates

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Multiplying the average P/E multiple with the forecast earnings per share of $8.56 gives a target price of $92.8 for the end of 2022. This price target implies a 32.1% upside from the September 2 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple	8.8x	9.8x	10.8x	11.8x	12.8x
EPS 2022 ($)	8.56	8.56	8.56	8.56	8.56
Target Price ($)	75.7	84.3	92.8	101.4	109.9
Market Price ($)	70.3	70.3	70.3	70.3	70.3
Upside/(Downside)	7.8%	19.9%	32.1%	44.3%	56.5%
Source: Author's Estimates

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Equally weighting the target prices from the two valuation methods gives a combined target price of $78.1, which implies an 11.2% upside from the current market price. As a result, I’m adopting a buy rating on Metropolitan Bank Holding Corporation.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This article is not financial advice. Investors are expected to consider their investment objectives and constraints before investing in the stock(s) mentioned in the article.

Comments

[Yieldcurve]

Where is their dividend?

[catsaunders financial]

REALLY????? With NO divvy, and at this price.........dream on and buy a quality NYC bank NYCB with a DRIP

[bluescorpion0]

any risk if there is a credit crisis?