Metropolitan Bank Holdings (MCB) is a New York-based commercial bank with a strong offering in the commercial real estate market. Since its IPO, the bank has generated a CAGR of over 40%. The bank’s cost of deposits is high compared to industry averages, but loan growth has been impressive. According to the Q4 Investor Relations Platform, commercial real estate loan books are conservatively managed, averaging ~63% loan-to-value and 43% multi-family loan LTV (for apartments with rent regulation ). For stabilized rent-regulated properties, the bank’s loan book has an LTV of around 34%, providing ample protection against any price declines.
Metropolitan Bank has a strong financial technology offering called Global Payments. Global Payments is a domestic and international digital payments settlement provider that provides a gateway to payment networks, such as Wire Transfer, ACH, Visa, MasterCard and discount. The solution enables merchants to acquire services for banked, underbanked and unbanked individuals. Over the past five years, the bank has grown its revenue from $3.4 million in FY17 to $16.4 million in FY21, a CAGR of 49%. With continued significant growth momentum, we expect the revenue mix to shift more towards non-interest income and reduce Metropolitan’s interest rate sensitivity.
From a profitability perspective, both ROA and ROE have evolved positively over time. The bank has shown that with the inclusion of Global Payments, the bank’s reliance on net interest income has diminished over time, while still representing a very large percentage of the total composition of income. Over time, as Global Payment continues to grow, we expect interest rate sensitivity to decrease further in the future.
The Metropolitan Bank has always managed a high quality loan portfolio. To some extent, the low loan loss is related to the strength of the New York real estate market. Since the start of the pandemic, many New Yorkers have decided to leave New York City, the epic center of COVID 19. To everyone’s surprise, 24 months into COVID 19, New York’s commercial real estate market York is as strong as ever. Rent rates are rising more than they were before COVID. With the right market exposure, Metropolitan will likely continue to see a low loss rate given that Big Apple has had one of the worst crises. The resilience of the market gives us great confidence in any real estate lender in the market going forward.
The bank has proven its ability to reduce the efficiency ratio over time. With a stable infrastructure, we expect the efficiency ratio to continue to improve, given the growth momentum of small cap Global Payment operations.
(Note that 2021 10K is not available, and therefore FY21 data is not available)
The stock is reasonably priced at 16x P/E and 2.0x P/TBV. The market is impressed with the bank’s ability to grow its asset balance and loan portfolio over time.
From a risk perspective, Metropolitan Bank’s above-average funding cost can be a major downside. That being said, most banks with a strong presence in New York will likely see a high deposit cost simply due to the intense competition in the local market. It might make sense for Metropolitan to explore mergers and acquisitions to access the low cost of filing in an adjacent area.
From a compensation perspective, the bank has two levers to drive growth: global payments, non-interest rate sensitive growth, and loan growth. We prefer to see a continued acceleration of Global Payment as it is a low capital, low human capital business with considerable scale potential.
Overall, we think Metropolitan Bank’s risk/reward dynamic is favourable. Given the relatively new launch of Global Payment, we felt the market was not valuing fintech properly. With the current momentum, Global Payment will continue to scale and drive commission revenue growth. In addition to non-interest income, the bank has exposed a robust commercial real estate market in New York and can continue to penetrate. Insiders own 25% of the company and will continue to create value on a risk-adjusted basis.