UBS - First Republic Bank Crashes 50%

2023-04-26 07:00:00 ET

Summary

• After losing more than $100B in investor deposits, the White House, Fed & Treasury are considering a bailout under an “open bank” rescue plan.
• Investors want their deposits back, and after plunging 50% on Tuesday following Q1 results and deposit outflows, FRC continued its freefall, -93% YTD.
• Exploring a potential acquisition, the number of FRC takers is fading, given the company’s deposits -40%, from $176.4B to $104.5B in a quarter.
• SA Quant rating put a Sell rating on FRC on October 20, 2022, when it traded for $111.47. The stock currently trades for $8.10/share. We’ll discuss how to spot stocks at risk of performing poorly using Seeking Alpha’s grading system.
• SA’s Quant Rating System has a track record of Strong Buy recommendations significantly outperforming the S&P 500, where Strong Sell and Sell calls substantially underperform the index.

First Republic Bank ( FRC ) Crashes

The breaking news early yesterday morning was the White House, Fed & Treasury were considering plans to save First Republic Bank under an "open bank" rescue.” Seeking Alpha News reported ,

“The next few days are expected to be crucial for the fate of First Republic Bank after the bank on Monday reported net deposit outflows of $72 billion during the quarter. First Republic plunged 28% [and closed down 49.38%].”

Notably, yesterday’s reported results and the follow-up comments from the company were like the carrot and the stick. After beating top-and-bottom-line Q1 2023 earnings , investors were unprepared to hear that deposits dropped by more than $70B.

"With the closure of several banks in March, we experienced unprecedented deposit outflows…We moved swiftly and leveraged our high-quality loan and securities portfolios to secure additional liquidity. We are working to restructure our balance sheet and reduce our expenses and short-term borrowings," said Neal Holland , First Republic CFO.

Down more than 90% over the last year and -93% YTD, First Republic posted an EPS of $1.23 that beat by $0.72 and revenue of $1.21B that beat by $78.73M. In hopes of a potential acquisition and restructuring by selling up to $100B of securities and mortgages, FRC’s struggle with deposit outflows has not left much to the imagination.

To purchase the bank’s “underwater” loans, few takers aside from the White House, Fed & Treasury were interested in the takeover. With hundreds of small businesses, startups, and investors facing a cash crunch, unlike the band One Republic, for the bank First Republic, “It’s too late to apologize” – to investors. One of the biggest losers in yesterday’s trading, what’s most telling about FRC were the warning signs highlighted by Seeking Alpha long before the crash.

Since October 20, 2022, Seeking Alpha’s quant system had a Sell rating on First Republic Bank when it was trading at $111.47, now trading at $8.85/share. After Silicon Valley Bank’s fall, the second biggest bank failure in history, regional banks, and financial institutions have followed suit. Seeking Alpha’s quant system also had a Sell on Silicon Valley Bank . Year-to-date, the Financial Services sector ( XLF ) is the worst performing.

Financial Services is the worst-performing U.S. sector YTD.

Spreading panic, four of the biggest U.S. banks lost a combined total of $52B in market value, and Swiss Bank Credit Suisse ( CS ) experienced an outflow of $119B in Q4, for its biggest annual loss since the financial crisis.

Despite UBS’ ( UBS ) acquisition of Credit Suisse, between March 23 and April 6, investors pulled an additional $2.5B. Where economies and banks of the past maintained substantial liquidity, and deposits surged at banks that invested the monies, the Fed’s attempts to tame inflation through rate hikes have resulted in an inverse relationship between interest rates and bonds. When the value of bonds goes down, yields rise. As U.S. Bank writes :

“In early March 2023, yields on U.S. Treasury securities stood at or near the highest levels seen in years. However, in just a matter of days, as issues emerged about troubled banks, investor sentiment changed. Many investors fled into the relative security of Treasury bonds. The result was a significant drop in bond yields.”

As banks that primarily invested in long-term bonds experienced falls in yield, the results were unrealized losses. As showcased by its Quant Ratings and Factor Grades scorecard, First Republic Bank, already rated a Strong Sell, took a nosedive amid the drop in yields.

FRC Stock was rated ‘Strong Sell’ in October ‘22 and has poor overall ratings

Our Seeking Alpha Factor Grades, which rate investments on a sector-relative basis, highlight FRC’s bearish Momentum with an ‘F’ grading and D- revisions grades with ten analysts that revised down over the last 90 days. Coupled with an ‘F’ grade for growth, indicating that this stock with poor ratings was at high risk of performing poorly.

FRC Stock Dwindling Growth and Momentum Grades Were a Warning

The Momentum Factor grade is one of the most important of Seeking Alpha’s five core factors concerning price predictability. FRC’s overall momentum grade of ‘F’ is based on the stock underperforming its sector by -91% over the last 52 weeks and the industry by more than 87% over the previous quarters’ price performance. The stock is down nearly 50% overnight, so the risk warning is well warranted, and I have included a link from BlackRock , an independent source, to describe how vital momentum is as a factor.

In addition to the individual grades, Seeking Alpha offers the warning banner I mentioned at the beginning of this article for at-risk stocks. Highlighted below, you’ll see a warning banner for FRC that has been on display for this stock since October 20, 2022, given its waning growth, whose forward ROE Growth of -44.37% vs. 1.95% for its sector peers and decelerating momentum signaled a Sell rating long before its March fall.

Seeking Alpha Offers Warning Banners for At-Risk Stocks

Several Seeking Alpha contributors agree with the SA Quant Strong Sell rating. Siyu Li wrote an article titled First Republic: I See Almost No Viable Path To Equity Survivorship. Another article titled First Republic Bank: We Have Reached A Point Of No Return perfectly summed up the situation by author Eugenio Catone :

"To make a long story short, First Republic's current situation can be compared to a person in a vegetative state kept alive by a plug. In this case, the plug is the FED's loans.”

Both contributors have Strong Sell ratings on First Republic Bank. There are many financials with sell or strong sell ratings, and you can create a screen focused on finding stocks to buy or sell for your portfolio. Below, I’ve highlighted ten recent Sell-rated financials with poor fundamentals.

Ten Financial Stocks With Quant Strong Sell Ratings

While some investors like to take risks on stocks with poor fundamentals in hopes that buying the dip will pay off, heed the warnings . Earnings Revision quant grades in the red could mean your stock pick is dead!

Seeking Alpha Quant Performance

Stocks with weak fundamentals carry the risk of losing money. As fears of an economic slowdown weigh on companies, especially those posting weak earnings, bearish momentum, and downward analyst revisions, it's crucial to utilize tools that make understanding the risks of stock winners versus losers clear.

The chart above highlights Seeking Alpha’s Quant Sell Recommendations, which have underperformed the S&P 500 using quantitative data. First Republic Bank possessed many tell-tale signs of a stock likely to perform poorly. From negative analyst ratings, bearish momentum, poor fundamentals, and lagging in the financial sector, separating weak stocks from the strong is crucial before jumping into bearish ideas. If you like financials and are keeping a list in a spreadsheet, consider Seeking Alpha’s Top Financial Stocks . Not only do our screens and tools help investors stay informed about the market news, but it also helps identify stocks that best fit their investment needs.

For further details see: