Raymond James downgrades Merchants Bancorp stock rating on valuation

Raymond James downgraded Merchants Bancorp (MBIN) to Market Perform from Outperform, citing limited upside as higher long-term rates weigh on gain-on-sale fees. The note flags elevated credit risk—non-performing loans at 2.08% of loans as of Q1 2026 in core multifamily and healthcare lending—while credit is described as stabilizing. The analyst also cut EPS forecasts due to reduced revenue-growth visibility, partially offset by improved noninterest expense and balance-sheet growth outlook; despite MBIN’s 46.8% YTD outperformance and trading near its $51.47 52-week high, near-term risk-reward is viewed as balanced.

Analysis

MBIN has likely already priced in a fair amount of the easy story: book value compounding plus a rate backdrop that keeps core NIM supported. The problem is that the market tends to pay up for banks when earnings are visibly de-risked; here, the incremental upside is increasingly hostage to either lower long-end rates or cleaner credit, and both are outside management’s control. That caps multiple expansion even if earnings remain resilient.

The bigger second-order issue is that this is a niche credit book, so higher-for-longer rates do not just pressure gain-on-sale economics; they can also slow refinancing and keep marginal borrowers stressed, especially in asset classes tied to multifamily and healthcare. If that stress lingers through the next 1-2 quarters, reserve builds can become self-reinforcing because the market will discount the quality of TBV growth, not just the pace of TBV growth. Regional-bank peers with less concentration risk should trade better on the same macro tape.

Contrarian view: the stock may be less overvalued than the downgrade implies because it still screens cheap versus quality of franchise, and credit appears to be stabilizing. But the consensus may be underestimating how quickly a near-52-week-high bank can de-rate once forward revenue visibility is questioned; when the market stops paying for rate optionality, performance can revert toward peer averages fast. The thesis is falsified if long-end yields roll over materially or if next-quarter NPLs/reserves show clear improvement rather than stabilization.

Key Decisions for Investors

• Fade strength in MBIN: initiate a tactical short or trim longs on rallies near the 52-week high, with a 1-3 month horizon and a tight stop above a clean breakout of ~$51.5; thesis is multiple compression if revenue visibility stays weak.
• Relative-value pair: short MBIN / long a lower-concentration regional bank or bank ETF (e.g., KRE) for 1-2 quarters; you are isolating idiosyncratic credit and rate-sensitive fee pressure rather than taking a pure rates view.
• If options liquidity is sufficient, buy 1-3 month put spreads on MBIN rather than outright puts to express the view that the stock is range-bound after the downgrade; target is modest downside, not a crash.
• Watch the next earnings print for two falsifiers: NPL ratio moving meaningfully below the current stabilization zone and reserve coverage not deteriorating. If either improves, cover shorts quickly because the market will re-rate the name back to TBV compounding.
• Do not add fresh long exposure until long-end rates roll over or management shows renewed upside to fee income; absent that, the risk/reward is balanced at best.