FRC - Why First Republic Bank's Stock Price Crashed And What Is The Outlook?

2023-03-28 10:30:00 ET

Summary

• First Republic Bank has lost almost 90% of its market value in the past one month, as the current banking crisis is deemed to have an adverse effect on FRC.
• In terms of the outlook, a short-term share price rebound for First Republic Bank is likely, but a sustainable recovery for FRC's shares will be difficult.
• My rating for First Republic Bank is a Neutral or Hold, which takes into consideration both FRC's valuations and outlook.

Elevator Pitch

I have a Hold or Neutral rating assigned to First Republic Bank's ( FRC ) shares. FRC's stock price has crashed by nearly 90% in a month, and its current valuation multiples are attractive on both an absolute and historical basis. But the outlook for FRC is murky, considering uncertainty over future regulatory changes, US consumers' stance regarding cash management, and the bank's ability to retain and grow deposits.

How Has The Banking Crisis Impacted First Republic Bank?

In the last one month, FRC's share price fell by -89.7% , while the S&P 500 has been flattish during the same period. First Republic Bank's stock price decline started on March 9, 2023 with its shares suffering from a -16.5% drop on news that "venture capital investors are moving their money out of the troubled Silicon Valley Bank" as reported by Seeking Alpha News .

The banking crisis has had a very negative impact on First Republic Bank's recent share price performance, as investors feared that FRC will suffer from substantial deposit outflows and a higher cost of funding.

FRC Stock Key Metrics

In this section, I highlight specific metrics which provide an indication of the potential negative effects brought about by Silicon Valley Bank's woes and the banking crisis.

According to the results of a recent survey conducted by Morning Consult on March 16-17, 2023, "16% of U.S. adults said they moved their money as a direct result of the failures of Silicon Valley Bank." It is noteworthy among those who transferred monies out of their banks, 36% of them chose to switch to a national bank as per the Morning Consult survey. Separately, a March 26, 2023 The Financial Times article cited data from EPFR highlighting that money market funds have seen their highest level of inflows (around $286 billion) in the current month which was only surpassed previously during the worst of the pandemic. These metrics seem to validate the market's concerns that FRC will witness lower deposit balances going forward.

Also, the Wall Street analysts' consensus FY 2023 normalized earnings per share or EPS forecast for First Republic Bank were cut by a significant -85.4% to $0.90 in the past one month. The substantial reduction in FRC's consensus bottom line projections is justified, as the bank had to change its funding mix in an unfavorable manner to mitigate the impact of deposit outflows. First Republic Bank issued a press release on March 16, 2023 disclosing that it has received deposits from other banks with a 120-day time frame, and taken on additional borrowings at a higher cost of funding as highlighted below.

First Republic Bank's New Deposits And Borrowings

In the subsequent section, I discuss if FRC's recent share price crash has fully priced in the headwinds faced by the bank.

Is FRC Stock Undervalued Now?

First Republic Bank's shares are at best fairly valued currently, rather than being undervalued.

As per valuation data sourced from S&P Capital IQ , FRC is valued by the market at 13.7 times consensus forward the next twelve months' normalized P/E and 0.17 times historical trailing price-to-tangible book or P/TBV. As a basis for comparison, First Republic's 19-year average P/TBV and normalized P/E multiples were higher at 2.30 times and 19.6 times.

Although First Republic Bank's stock appears to be undervalued based on a historical valuation comparison, there are downside risks which could further depress FRC's share price. One key risk factor is that FRC fails to retain a majority of its client deposits in a few months' time, after the $30 billion deposits from the major banks with a 120-day duration are returned. Another key risk factor is that First Republic Bank will either have to do a significantly dilutive capital raise or undergo a fire sale at a substantial valuation discount.

Can First Republic Bank Stock Rebound?

A rebound in FRC's share price in the short term is probable.

Seeking Alpha News reported on March 26, 2023 that "U.S. regulators are evaluating expanding an emergency lending facility for banks." This will help to boost depositors' confidence to some extent. This should also buy time for First Republic Bank to consider and explore strategic options like fundraising or asset divestments.

But a sustained recovery in First Republic Bank's share price is less likely. Deposits are unlikely to return to FRC in a big way, unless all banks' deposits are fully covered by FDIC insurance, which the regulators have yet to commit to. Also, one needs to take into account the bank's prospects for the long run as detailed in the next section.

What Is The Long-Term Outlook?

The long-term outlook for First Republic Bank is mixed.

On one hand, First Republic Bank has built a very strong brand, as evidenced by specific metrics disclosed at its 2022 Investor Day hosted on November 9 last year. FRC's Net Promotor Score or NPS for 2021 was 79 , which is way higher than Apple's ( AAPL ) NPS of 60 and a mean NPS of 34 for domestic banks. Furthermore, FRC revealed at the previous year's Investor Day that its current customers and their related referrals generate almost 90% of the bank's new loans.

It is reasonable to assume that First Republic Bank is well-positioned for growth in the long run by leveraging on its brand equity, assuming that it survives this banking crisis without a permanent loss of deposit clients in large numbers.

On the other hand, the current banking crisis might have led to structural changes which will make it tough for First Republic Bank and other regional banks to maintain a similar pace of deposit growth which they have achieved in the past.

Returning to the Morning Consult survey which I made reference to earlier, an increasing number of US consumers are considering a new banking services provider with a preference for national banks, and more of them are diversifying where they keep their monies. The proportion of US consumers with the intention to seek out a new bank rose from 15% in February to 23% for March; while others have chosen to withdraw part of their monies from banks and invest in financial investments, commodities, and digital assets.

Competition for consumers' monies will intensify going forward, and it will become more challenging for First Republic Bank to attract deposits in the future. Firstly, confidence in banks, especially non-national banks, would have been hit by the recent banking crisis to a considerable degree. Secondly, FRC's strategy of gaining deposits with attractive rates might be less effective in a " higher for longer " interest rate environment.

Is FRC Stock A Buy, Sell, Or Hold?

FRC's stock is rated as a Hold. First Republic Bank's valuations are depressed now, based on a comparison of its current multiples with its historical averages. But there is too much uncertainty relating to the outlook for the US banking industry and the bank to have a bullish rating for First Republic Bank. As such, I think that a Hold rating for FRC is fair and suitable.

For further details see: