MCB - Metropolitan Bank Holding: Favorable Risk/Reward Profile

2023-09-11 03:07:32 ET

Summary

• Metropolitan Bank Holding Corp. operates in a volatile regional bank industry, but presents a solid risk/reward scenario with potential for value appreciation.
• MCB has a strong loan portfolio and targets businesses with strong cash flows, which could lead to higher valuations in the future.
• MCB's CEO highlighted the company's efforts to offload risky crypto deposits and replace them with lower-cost deposits, which could improve net interest margin and earnings potential.

Introduction

Metropolitan Bank Holding Corp. ( MCB ) operates in the regional bank industry, an industry that has seen its fair share of volatility this year because two of the larger businesses there are seeing their operations be turned upside down after significant bank runs. A common theme for companies in the sector has been a significant valuation correction for companies, the same going for MCB.

This has however opened up what I think is a very solid risk/reward scenario where value can be derived from the share price eventually getting a value more similar to the rest of the sector because of solid asset leverage and delivery on earnings growth. As I said, the low p/e of just 6 is too good to pass up on. I think a smaller position makes sense to establish in the company to get some pretty decent returns from here. As a conclusion, I am rating MCB stock a buy right now.

Company Structure

The performance of the share price for MCB in the last 5 years has been anything but impressive, unfortunately. The shares reached a high of around $110 per share back in early 2022 but have since been on a very clear downtrend as rates began increasing and the earnings seemed to take a hit for MCB. The investment thesis around MCB right now is that rates will eventually start to go down and more border and intense activity will resume which will be beneficial to MCB.

MCB serves as the pivotal bank holding entity overseeing the operations of Metropolitan Commercial Bank. This bank is dedicated to offering an extensive array of banking solutions catering to diverse sectors, encompassing businesses, commercial entities, and retail customers alike. With a robust commitment to serving the financial needs of small businesses, MCB has positioned itself as a cornerstone of support within the entrepreneurial landscape.

The growth of the company through the last few years has in my opinion been very impressive and the portfolio sits at the highest it has ever been at. Decent inflows of capital despite higher interest rates seems to have been some of the driving force behind this right now. MCB does target business for loans and has made it clear they favor those with strong cash flows which makes paying back debt far easier in turn for MCB, it lends them a more stable and safe loan profile, which I think should be rewarded with something higher then it currently gets.

Earnings Transcript

On July 21 the last earnings call was held by the company and the CEO of the company Mark DeFazio had some good comments I think are worth highlighting.

• “It is important to recognize that MCB caused more margin compression than we would have experienced to date by deciding to offload 100% of crypto deposits. In 2022, MCB moved off balance sheet a total of $754 million in zero-cost deposits from their peak at June 30, and year-to-date, June 30, 2023, we moved off an additional $436 million of crypto-related deposits as well as having the ability to absorb the temporary margin compression that came with replacing these deposits”.

Taking steps to offload what is considered a risky investment I think is wise right now. Crypto is a heated topic and right now I think the prospects of growth from it are not worth the risks I like the steps that MCB took to help offload this and get into a leaner and more flexible financial position.

• “Looking forward with the addition of lower-cost deposits that are coming in from the new verticals we have announced in the second quarter, along with the many diversified core deposit verticals we already have embedded into the franchise, we are very close to an inflection point where NIM compression from replacing crypto deposits with borrowings will transition to expanding net interest margin as we efficiently replace those borrowed funds with lower-cost deposits and maintain our discipline on low pricing”.

This comment I think very well highlights some of the challenges the company is facing right now. They need to prove they can expand margins and maintain them as well. The net margins are at a TTM of under 23% which is below the sectors averages. If MCB can return to the over 30% they have averaged then perhaps a p/e closer to 8 - 9 can be justified and that is what I am betting on with MCB right now as I have them as a buy. Looking at the historical valuations for MCB the p/e has averaged 9.9 in the last 5 years and the p/b 1.33. Right now MCB is trading nearly 50% below both of these numbers and indicates to me that the risk/reward profile is very good.

Risk Associated

When it comes to credit risk assessment, it's important to address the substantial exposure to commercial real estate, which currently constitutes 67 percent of the loan portfolio . While this allocation might raise concerns, it's noteworthy that there are no immediate indicators of evident deterioration within this sector. Additionally, a significant aspect of evaluating credit risk is the weighted average LTV ratio, which stands at a robust 60 percent.

In considering potential scenarios, the impact of variations in the Fed Funds Rate emerges as a critical aspect influencing the bank's outlook. Should the Fed Funds Rate experience an increase of 100 to 200 basis points, the anticipation is that net interest income would exhibit a corresponding decrease as activity in deposits may halt and harm growth prospects for MCB. Conversely, in the event of a reduction in the rate, the inverse effect would likely transpire. This nuanced interplay underscores the bank's intricate relationship with monetary policy dynamics. The risk here is that the Fed actually sees it as necessary to continue to raise the rates and that will eventually cause MCB to start performing quite, as per their predictions. If the net interest incomes start to decrease too quickly I think the share price will start to fall quite quickly and investors won’t have any buybacks or dividends to lean back on and gain value from.

Investor Takeaway

My sense with MCB right now revolves around interest rates eventually starting to go down which should be boosting the earnings potential for MCB as they are predicting too. The risk is that rates stay level for a longer period and then the valuation for the company right now seems quite justified as it's accounting for those risks. I think that allocating a smaller portion of a portfolio to the company is the best way to go about this, something like 0.5% - 1%. The upside is strong if the rates would go down and the earnings for MCB go up, I think a p/e around 8 - 9 is plausible. As a result, I am rating the company a buy right now.

For further details see: