FCNCA - First Citizens Bancshares: SVB Addition A Major Tailwind For Years To Come

2023-09-20 12:28:38 ET

Summary

• First Citizens BancShares won the bidding war for Silicon Valley Bank, acquiring its assets at a significant discount.
• The acquisition has strengthened First Citizens BancShares' deposit base and positioned it for future growth opportunities.
• The company has seen good loan growth and improved efficiency, making it an appealing investment with potential for further share price appreciation.

Introduction

The share price for First Citizens BancShares ( FCNCA ) was ignited in March this year as the company started bidding on Silicon Valley Bank and ultimately won the bidding war. It is now in the process of completing the integration of SVB successfully and leveraging its assets into stronger earnings for itself. The company came out as a clear winner after all the turmoil that went on in that market earlier this year. The additional assets the company managed to acquire are setting it up to be a significant long-term opportunity for investors.

The steep discount that FCNCA was able to acquire SVB at has significantly added value and assets to the balance sheet at no excessive costs. This also are lending more diverse regional exposure for FCNCA, and I think this will be a tailwind going forward. If the interest rates stay where they are for the better part of 2024, I think that FCNCA will post some very impressive earnings results for that year. I like where the business is heading and will be rating it a buy as a result right now.

Company Structure

FCNCA serves as the holding company for First-Citizens Bank & Trust Company, offering a comprehensive range of retail and commercial banking services to individuals, businesses, and professionals. The bank's diverse array of deposit products encompasses checking and savings accounts, along with money market and time deposit accounts. These deposit offerings cater to the financial needs of a broad customer base, ensuring a well-rounded suite of banking solutions for both personal and business clients.

FCNCA has been able to see decent stability in the deposit rates over the last few months. The higher interest rates are, however, showing to have some effects on the balance sheet for FCNCA. On a QoQ basis, the company has seen a $6.8 billion decline in the loans which has been driven by declines in Global Fund Banking and lower private market deals. This, I think, will be a consequence that will persist because of the higher interest rates, but that hasn't stopped the asset value and book value of FCNCA from increasing immensely over the last months.

FCNCA, through its strategic move, acquired a substantial $72 billion worth of Silicon Valley Bank's assets, securing them at a remarkable discount of $16.5 billion below their true market value. This acquisition significantly bolstered the FCNCA deposit base, which stood at $89.4 billion by the end of the fourth quarter. The infusion of SVB's deposits has notably strengthened the bank's position as a formidable deposit franchise, positioning it for greater financial stability and growth opportunities in the future. The discount that FCNCA got here is one of the leading drivers behind the significant share appreciation that has occurred over the last few months in my opinion.

The addition of SVB has led the book value of FCNCA to go from $605 on December 31, 2022, to a TTM of $1.300. That means FCNCA is right now trading more or less in line with the book value and has been one of the best investments in the regional bank's industry this year by far. It continues to improve itself as the last quarter displayed that the efficiency ratio of the company drastically improved as well to 60%, down from 66% the year prior.

Earnings Transcript

With the immense progress and events that have occurred around FCNCA, I think it's important we get some comments from the management of the business as well. In the most recent earnings call that was held, the CEO Frank Holding had some good comments to share.

• “In addition to deposit growth, our commercial and general bank segments posted solid loan growth. We finished the second quarter with a CET1 ratio of 13.4%. Since year-end, we've accreted 228 basis points of capital from the SVB acquisition and 69 basis points from retained earnings. While we continue to build capital to support clients and drive organic growth, our goal is to operate with efficient levels of capital defined by our target ranges”.

Good loan growth levels within some segments of the business I think is very reassuring to see right now and does certainly improve the buy case in my opinion. We likely won't fully see the impact of the SVB additions in just the next few quarters, but rather the next few decades instead. The additional regional exposure the company has managed to gather up I think will lend it very much to expand the earnings potential.

Valuation & Comparison

Most of the time I base my valuations on a GGM model, but given that FCNCA doesn't have a significant yield right now, it makes more sense to look at the p/e and p/b of the company instead.

On a p/e basis, I think that FCNCA looks very appealing right now. It's over 30% below its historical avenger p/e and I think that is better to base a valuation on rather than the sector median. FCNCA has been able to deliver a significant shareholder return over the years and I think the short-term brings more upside potential. A p/e of 9 seems fair, as the additional earnings power that the SVB integration brings I don’t think is fully realized yet.

The p/b for the company looks quite decent too. With most banks, you are looking for something around or ideally below 1. With FCNCA you are getting that right now which makes it a buy in my book.

Risk Associated

I would like to make the case that operational risks for FCNCA have decreased following the SVB transaction. This acquisition has not only expanded the bank's deposit base but also diversified its loan portfolio. Nevertheless, it is essential to acknowledge that there remains a potential risk on the horizon – the possibility of other regional banks facing financial challenges. Such events could potentially rekindle a crisis of confidence within the regional banking sector, warranting vigilance from investors and stakeholders alike.

Investors should keep a close watch on FCNCA in the coming quarters, particularly regarding the potential inheritance of Silicon Valley Bank's inherent risks stemming from startup and venture capital funding. It will be crucial to monitor FCNCA's efficiency ratio to gauge how effectively the bank manages these risks and maintains operational efficiency. As the integration unfolds, this ratio will provide valuable insights into the bank's ability to navigate the complexities associated with its expanded portfolio of venture capital clients.

Investor Takeaway

First Citizens BancShares, Inc. has come out of the banking crisis this year as a significant winner. The company acquired SVB for an impressive discount, and the additional assets it has brought make me very bullish on the earnings potential of FCNCA. I think that the coming quarters will showcase further loan growth in some segments and ultimately lead to further share price appreciation. I like the business and will be rating it a buy for now.

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