Source: Beast Finance Author: Beast Finance
How has the U.S. banking crisis affected First Republic?
Shares of First Republic (FRC) have lost -89.7% over the past month, while the S&P 500 is flat over the same period. First Republic's share price decline began on March 9, 2023, on media reports that "venture capital investors are pulling money out of troubled Silicon Valley bank," and since then First Republic's share price has It fell 16.5%.
The U.S. banking crisis has also had a very negative impact on First Republic's share price recently, as investors fear the bank will suffer large deposit outflows and higher funding costs.
Key Indicators for First Republic Bank Stock
In this article, we will focus on some specific indicators that can show the distress of Silicon Valley Bank (SIVB) and the potential negative impact of the US banking crisis.
According to the results of a new survey conducted by Morning Consult on March 16-17, 2023, “16% of U.S. adults said that the large number of customer withdrawals was the direct cause of the collapse of Silicon Valley Bank
. 36% of people who have funds choose to transfer their money to national banks. In addition, according to EPFR data, money market funds have seen the highest level of inflows (about 286 billion U.S. dollars) this month. This has only happened when it was severe. These indicators all confirm the market's concerns that First Republic Bank will experience a decline in deposit balances. In addition, Wall Street analysts' forecasts for First Republic's fiscal year 2023
normal EPS are also in the A massive 85.4% downgrade over the past month to $0.90. Beast Finance thinks Wall Street is justified in sharply lowering First Republic's EPS forecast as the bank has to shift its funding mix in an unfavorable way to mitigate deposit outflows Impact. First Republic Bank has issued a press release dated March 16, 2023, disclosing that it has received deposits with 120-day maturities from other banks and has made additional borrowings at higher funding costs, as set forth below.
First New deposits and borrowings at Republic Bank
Source: First Republic Bank press release March 16, 2023
In the next section, we'll analyze whether First Republic's recent stock price plunge has fully priced in the headwinds facing the bank.
Is First Republic Bank Stock Undervalued Right Now?
Beast Finance believes that the valuation of First Republic Bank is reasonable at present and has not been underestimated.
According to valuation data from S&P Capital IQ, the market's valuation of First Republic Bank is 13.7 times its normalized price-earnings ratio for the next 12 months, and 0.17 times its historical tracking price-to-book ratio. For comparison, the average historical trailing price-to-book ratio and normalized price-earnings ratio of First Republic Bank in 2019 are higher, at 2.30 times and 19.6 times, respectively.
While First Republic appears to be undervalued based on historical valuation comparisons, downside risks remain and could further depress the stock. A key risk factor is First Republic's inability to retain most of its customer deposits for months after $30 billion in 120-day maturities at several big banks. Another key risk factor is that First Republic would either have to undertake a substantially dilutive capital raising, or sell itself at an extremely low price.
Can First Republic shares bounce back?
Beast Finance believes that the stock price of First Republic Bank is likely to rebound in the short term.
Some media reported on March 26, 2023 that “U.S. regulators are evaluating the expansion of bank emergency loan arrangements.” This will boost depositors’ confidence to a certain extent. It also buys First Republic time to consider and explore strategic options such as financing or divestitures.
But a sustained recovery in First Republic shares is unlikely. Unless all bank deposits are fully insured by the Federal Deposit Insurance Corporation (FDIC), it is unlikely that deposits will flow back to First Republic in large numbers, and regulators are not currently committed to doing so.
What is the long-term outlook for First Republic Bank?
Beast Finance believes that the long-term prospects of First Republic Bank are mixed.
On the bright side, First Republic has built a very strong brand, as evidenced by the specific metrics it disclosed at its 2022 Investor Day held on November 9 last year. First Republic's 2021 Net Promoter Score (NPS) of 79 is well above Apple's (AAPL) NPS of 60 and the average NPS of other U.S. banks of 34. In addition, First Republic revealed at its investor day the previous year that nearly 90 percent of its new loans had been generated by its existing customers and their related referrals.
It's reasonable to think that First Republic is well positioned to leverage its brand equity for long-term growth, provided it rides through this banking crisis without permanently losing a significant number of depositors.
The worrying aspect is that the current banking crisis may produce structural changes that will make it difficult for First Republic and other regional banks to maintain deposit growth rates similar to those seen in the past.
Morning Consult's survey results show that more and more American consumers are considering re-selecting a new bank as a service provider, and they are more inclined to choose a national bank, and more and more people are diversifying where their funds are kept. The percentage of U.S. consumers intending to look for a new bank has risen from 15% in February to 23% in March; while others are opting to withdraw some of their funds from banks and invest in financial investments, commodities and digital assets.
Beast Finance predicts that the competition for consumer funds will intensify in the future, and the challenge for First Republic Bank to attract deposits in the future will also be greater. First, people's confidence in banks, especially in non-state-owned banks, has been hit largely by the recent banking crisis. Second, First Republic's strategy of attracting deposits with attractive rates may no longer be effective in an environment of "persistently high interest rates."
Conclusion
As there are too many uncertainties in the US banking crisis and the prospect of First Republic Bank, so, Boldbeast Finance is very pessimistic about the investment prospect of First Republic Bank.
Boldbeast Finance is committed to enabling every unwilling young man to learn how to invest in Hong Kong and US stocks, and to experience the fun and excitement of being the shareholder of the world's largest company in the most mature and compliant market in the world. Let every young person have dignity and equality to gain freedom through investment in Hong Kong and US stocks.