2023-06-29 13:02:52 ET
Summary
- First Citizens BancShares significantly benefited from the acquisition of Silicon Valley Bank, increasing its deposit base, loan book, and diversifying the regional bank.
- The bank has reassuring levels of liquidity and potential for increased lending opportunities in the venture capital market.
- Despite a major upside revaluation after the acquisition, shares of First Citizens BancShares are still trading at a discount to book value, indicating potential for further growth.
- The bank's risk profile is skewed to the upside, in my opinion, as it capitalizes on its new strength in the venture capital industry.
First Citizens BancShares (FCNCA) is one winner of the financial crisis that transpired after Silicon Valley Bank went under in March. First Citizens BancShares subsequently acquired SVB's loan portfolio and deposits from the Federal Deposit Insurance Corporation at a steep discount to the assets' real value. For First Citizens BancShares, the transaction has proven to be enormously beneficial as it materially grew its deposit base and loan book. Additionally, the transaction resulted in a much more diversified regional lender with increasing credit opportunities in the venture capital market. Shares are currently trading slightly below book value and have continual revaluation potential as investors realize the bank's growth opportunities, in my opinion.
First Citizens BancShares is now a huge deposit franchise
The regional bank acquired $72B of Silicon Valley Bank's assets at a significant ($16.5B) discount to their real value . First Citizens BancShares only had $89.4B in deposits at the end of the fourth-quarter and the acquisition of SVB's deposits made First Citizens BancShares a significantly stronger deposit franchise: at the end of the first-quarter, the regional bank reported $140.1B in deposits, $49.3B of which were legacy deposits from Silicon Valley Bank. The acquisition therefore boosted First Citizens BancShares' deposit base by approximately 57% quarter over quarter.
While First Citizens BancShares' legacy deposit base increased after the first-quarter, by approximately $2.6B, depositors at the former SVB continued to pull $5B of deposits out of the old franchise. Since then, however, deposits stabilized and I believe that deposits could ultimately be returning to First Citizens BancShares. Deposit trends have generally been positive and they indicate that investors' confidence is returning to the regional banking market.
First Citizens BancShares has very comfortable liquidity levels as more than 200 percent of the bank's uninsured deposits are now covered by the bank's liquidity resources. The liquidity coverage ratio (that concerns uninsured deposits) was 198% at the end of Q1'23, indicating that the bank shouldn't have any problems meeting withdrawal requests. The liquidity coverage ratio improved to 219% one month after the first-quarter.
Much more diversified loan portfolio, new lending opportunities
The acquisition of Silicon Valley Bank's loan portfolio was a shrewd move on the part of First Citizens BancShares' management because the regional bank acquired a new line of business that is set to generate new lending opportunities, especially in the venture capital market. Silicon Valley Bank had a strong lending focus on Technology & Life Science/Healthcare start-ups which hurt the bank as venture-backed companies pulled their deposits from SVB during the March financial crisis. With the market situation stabilizing, however, I believe First Citizens BancShares has a huge new growth opportunity in this new market.
Before the SVB transaction, First Citizens BancShares owned loans worth $72B which after the transaction increased to $138B, showing 92% acquisition-driven growth. Additionally, due to the inclusion of the Technology/Life Science/Healthcare business, the regional bank reduces its reliance on its large Branch network and wealth business.
Regional bank trading at a discount to book value
First Citizens BancShares has seen a strong upside revaluation of its shares after the regional bank announced that it would buy Silicon Valley Bank's core assets. The bank's acquisition of SVB boosted its tangible book value from $571.89 per-share at the end of the fourth-quarter to more than twice that amount: $1,213.82 per-share at the end of Q1'23, showing an increase of 112% quarter over quarter.
Despite the revaluation that has taken place after the acquisition announcement in March, shares of the regional bank are still selling at a discount to book value which is what I believe skews the risk profile to the upside.
First Citizens BancShares is now trading at 0.97X book value. Other regional banks including Bank of New York Mellon ( BK ) and PNC Financial Services ( PNC ) are selling at similar valuations: around book value. Considering that First Citizens BancShares has become a much larger deposit franchise with increased lending opportunities in the venture market, I don't see why FCNCA could not trade at a 10% or 20% premium to book value, especially as banking conditions in the regional banking market continue to normalize.
As I have said multiple times in the last three months, the regional banking market is fundamentally undervalued as the sector is still reeling from the deposit crisis that unfolded after the failure of Silicon Valley Bank in March. Most regional banks are still on sale, in my opinion, including First Citizens BancShares.
Risks with First Citizens Bancshares
I would actually argue that operational risks for First Citizens BancShares have decreased after the SVB transaction because a larger deposit base and a more diversified loan portfolio has resulted from the acquisition. However, there is a risk that other regional banks could fail going forward which could reignite a confidence crisis in the regional banking market.
Closing thoughts
The acquisition of SVB's deposits and loans was a truly transformative development for First Citizens BancShares: the bank has not only seen large increases in its loan and deposit books, but the regional bank is now also much more diversified in its lending business and has new opportunities in the venture market, Silicon Valley Bank's former core focus in the lending industry.
Shares of First Citizens BancShares are still trading at a discount to book value as well. Although a major upside revaluation has already taken place after the acquisition was announced, I continue to see upside potential for First Citizens BancShares. I also believe the risk profile remains skewed to the upside as the bank capitalizes on its new strength in the venture capital industry!
For further details see:
First Citizens: A Potential Winner Of The Financial Crisis