Meta Financial Stock: Upside Potential Given Growth Outlook (NASDAQ:CASH)
Banking stocks look appropriately undervalued as demand for bonds, due to the flight to quality led by Ukraine and Russia, drove longer-term rates lower, sending 11% lower. % of its value to the KBW banking index.
But in a universe of hundreds of investable bank shares, which one to choose? We are looking for a few key criteria to add banking stocks to our watchlist.
We look for bank stocks with a high expected target valuation (above 25%) based on a clear path to growth evidenced by a consistently high and improving return on risk-weighted assets (with a margin of surprise bullish and without a worryingly high leverage ratio) of a portfolio well positioned to take advantage of a rising interest rate environment.
One such identified security is Meta Financial Group (“Meta” or “NASDAQ: CASH“).
Meta Financial Group is a regional bank that offers a range of consumer, business and corporate services. CASH invests its deposits in loans and leases and provides bank-as-a-service financial solutions to third-party distributors.
Heading into the first quarter of 2022, META’s performance was positive, generating revenue of $550 million (up 10%) and EPS of $4.38 per share (up 49%) in during fiscal 2021. In the first quarter of 2022, despite a slight underperformance in revenue (-5%), EPS exceeded expectations and managed to beat 15%, to $0.78 (comprehensive expectations). street: $0.68), largely due to lower provisioning. We much prefer to see beats based on increased revenue or reduced operating margins, but weaker and sustained provisioning could signal a lower risk profile. We expect a lot more to come from this stock over the next two years.
Net interest income
Traditional banking ratios give a falsely negative image of the bank. Despite a decline in the NIM of 120 basis points between 2019 and 2021 and a decrease in net lending of 2.4%, CASH managed to increase net interest income per RWA by 70 basis points, net income by interest increasing by 5%.
This was largely due to falling interest on deposits as short-term yields fell over the past few years (see chart below peg CASH interest on deposits to 90-day rates)
The pace of net interest income growth is promising heading into 2022, with CASH increasing this line by 9% in the first quarter, benefiting from strong loan growth (about 6%) and improving the active/passive combination.
Expect NIM to hold its own over the next year as the downward trend in funding costs persists as CASH continues to grow its stable base of lower-cost core deposits. CASH will continue to have one of the lowest funding costs in the banking industry.
CASH’s largest lending segment, trade finance, is expected to see strong growth in 2022, with the bank reporting a “full pipeline” in its first-quarter call. Loan growth has averaged 7.4% over the past 3 years, but we believe there is room for more given the momentum we saw in the first quarter. As the economy continues to stabilize (post-Covid) and demand for working capital returns, we could see growth above 8% in 2022.
The bank has placed non-interest income at the heart of its strategy, so it is no surprise that non-interest income per RWA has shown strength over the past 4 years, growing from 4, 7% to 6.3% between 2018 and 2021. Indeed, they see this as one of their key points of differentiation from the broader banking landscape that focuses on net interest income. Meta will focus on fee and service revenue to continue its interest-free expansion.
Card fee revenue will increase due to their BaaS stream and the addition of the H&R block. In previous quarters, the government’s stimulus package naturally reduced demand for tax refund advances. About $817 billion in stimulus payments were sent in the last cycle in the spring of 2021. As stimulus funding dissipates, we can expect much more strength in this position.
Compensation is the largest component of non-interest income, which has increased significantly in recent years as the number of employees and average compensation have increased.
In the fourth quarter, management explained that although employee-related expenses have increased over the past few years, revenues have grown faster, as evidenced by the bank’s efficiency ratio which improved by 10pp. since 2018, despite rising costs.
However, in the same Q4 call, management hinted that this trend may be coming to an end as opportunities were presented to them to add more scale. We expect compensation to continue to grow, which will drive up non-interest expense over the next operating period.
Our calculations show that Meta has one of the highest profitability rates in the industry, measured by RWA-adjusted net income. CASH’s rate of return exceeds the average of its peers by more than 150 basis points, resulting in a best-in-class adjusted return on invested capital.
We expect leverage to increase to historical averages and for a moderate return on risk-weighted assets in 2022, before accelerating in 2023 as spending levels out and other revenues that BaaS interest will continue to grow.
Our 2023 EPS estimate of $5.96 is applied to the target forward PE of 12.5x, which is between the middle and upper quartile of CASH’s historical trading range. This gives us a Base 2023 valuation of $69.20 for a yield on today’s price ($54) of 28%.