2023-04-04 13:43:49 ET
Summary
- The FCNCA stock has recorded an impressive rally, likely leaving the bears behind to lament over missing the March 2023 bottom.
- For now, the bank appears to benefit from the SIVB takeover, potentially expanding its asset portfolio while spreading the risks of credit losses.
- FCNCA's strategy of acquiring government-seized lenders since 2009 appears to be highly successful, expanding its top and bottom line at a 5Y CAGR of 39.51% and 49.13%, respectively.
- This is on top of the excellent Stock Price Returns of over 435% over the past ten years.
- However, with the stock already trading near its fair value, investors who add here may encounter a reduced margin of safety. We shall discuss further.
It's Too Late To Join The FCNCA Rally
FCNCA 3Y Stock Price
The First Citizens BancShares (FCNCA) stock has already recorded an impressive recovery to $950.79 from the recent March bottom, attributed to the positive optics from the SVB Financial (SIVB) acquisition in our view. It is also charting new highs by a wide margin compared to pre-banking crisis levels of $702.71 and pre-pandemic levels of $530.04.
It is for this exact reason that we prefer to exercise caution here, since it is unknown if the recent optimism may hold for the foreseeable future, due to the uncertain macroeconomic outlook through 2024.
The Fed's interest rate hike cycle has yet to end, with the projected terminal rate of 5.25% and a pivot probably only from 2024 onwards. While the White House expects the US inflation to be tamped down to 2.4% by 2024 , closer to the Fed's target rate of 2%, the path ahead remains challenging. The elevated interest rate may also further expand FCNCA's interest expenses, which have grown by 665.5% YoY to $467M in FY2022, while potentially impacting its borrowers' capability in meeting payment obligations.
Details On SIVB Acquisition
For now, FCNCA appears to have benefitted from the SIVB deal, with the former scooping up the latter's assets worth $110.1B with a $16.5B discount. The FDIC had also agreed to finance part of the acquisition with a 5Y $35B loan, while similarly splitting half of any potential commercial loan losses above $5B, tempering some of the headwinds ahead.
Furthermore, FCNCA will gain $56.5B of SIVB's deposits, with the FDIC also extending a $70B line of credit to cover potential liquidity issues. Naturally, the former would not be acquiring any of the debts and common/preferred stock obligations.
FCNCA's Closing Balance Sheet
These terms appeared very attractive indeed, given the excellent support FCNCA might enjoy from the FDIC ahead. This was on top of the eventual expansion of its assets by +100% to $219B, loans by +101.4% to $143B, and deposits by 62.9% to $145B. This was compared to the bank's FY2022 asset levels of $108.93B (+98.1% YoY) and deposits of $89.91B (+86.3% YoY), respectively.
On one hand, we reckoned FCNCA's performance might be diluted by the SIVB acquisition, given the latter's lower Net Income Margin [NIM] on its interest-bearing deposits and lower Return On Average Assets [ROAA].
In FY2022, FCNCA reported an improved NIM of 3.14% (+0.48 points YoY) and ROAA of 1.01% (+0.01 points YoY), compared to SIVB's lower numbers of 2.16% (+0.14 points YoY) and 0.7% (-0.14 points YoY), respectively.
In addition, only $29.13B (+26.9% YoY) or 32.3% of FCNCA's deposits were uninsured in the latest fiscal year, suggesting a reduced flight risk then. This was compared to SIVB's uninsured deposits of $151.5B (-8.7% YoY) at a ratio of 87.5% at the same time.
While SIVB's total deposits were already decimated by -62.7% to $56.5B at the time of closure, it remained to be seen what ratio the final uninsured deposits might be, though FCNCA highlighted that it would have more than enough liquidity at over 175% of uninsured deposits post-acquisition.
On the other hand, SIVB's loans past-due-90-days only comprised 0.18% (+0.04 points YoY) of its total loans in FY2022, compared to FCNCA at 1.22% (+0.79 points YoY) at the same time.
SIVB's provision for credit losses for underperforming loans was notably lower at $420M (+241.4% YoY) at a ratio of 0.86% (+0.22 points YoY) in the latest fiscal year as well, compared to FCNCA at $645M (+1743.2% YoY) and 1.3% (+0.75 points YoY), respectively, suggesting the former's improved credit quality thus far.
FCNCA regularly "pursues growth through strategic mergers and acquisitions to enhance organizational value, strengthen its presence in existing markets, as well as expand its footprint in new markets," particularly through the acquisition of over "20 government-seized lenders " since 2009. This cadence is almost similar to JPMorgan's (NYSE: JPM ) role in the previous and current banking crisis , in our view.
As a result, we reckon the SIVB acquisition may temper some of FCNCA's profitability headwinds in FQ4'22, due to the potential synergies.
The same has been surmised by market analysts, due to the notable upgrade in the bank's projected FY2023 EPS to $110.43 (+42.9% YoY), compared to FY2022 levels of $72.69 (significantly aided by the acquisition of CIT Bank completed in January 2022) and FY2021 levels of $50.05.
FCNCA's deposit base appears stable as well, growing by $1.3B despite the massive outflow of $108B from small/mid-sized banks to bigger banks in the recent banking crisis.
This suggests a lower likelihood of the bank realizing losses in the Available-For-Sale [AFS] securities of $973M (+1607% YoY) at a ratio of 9.7% (+9.1 points YoY) and in the Held-To-Maturity [HTM] debt securities of $1.48B (+2,550% YoY) at a ratio of 14.4% (+10 points YoY) in FY2022. This is further aided by the securities' moderate maturity terms of 3.5 years and 5 years, respectively.
Unfortunately, in light of the banking crisis, the regulators may impose stricter regulations on mid-sized banks ahead, with higher capital and asset requirements once above the $100B asset threshold. While it is unknown if the reform may be passed , the stricter supervision may limit FCNCA's long-term prospects and stress test, in our view, especially given the addition of SIVB's deposits and assets worth approximately $128.5B ahead.
FCNCA & Peers 1Y P/E Valuations
In addition, the FCNCA stock is already trading near its fair value of $950.80, suggesting a minimal upside potential from current levels. This is based on its projected FY2023 EPS of $110.43 and 1Y P/E mean of 8.61x. The stock's P/E valuation is not overly optimistic as well, as the bank finally enters the top 20 banks in the US, in terms of its asset size of $219B post-acquisition.
FCNCA now nears its mid-sized bank peers, with SIVB similarly trading at 13.82x prior to the banking crisis:
- Morgan Stanley (NYSE: MS ) with assets of $201.36B and P/E of 12.26x.
- Fifth Third Bancorp (NASDAQ: FITB ) with $206.28B and 7.16x.
- Citizens Financial (NYSE: CFG ) with $226.4B and 6.06x.
- State Street Corporation (NYSE: STT ) with $298.02B and 8.89x.
- Bank of New York Mellon (NYSE: BK ) with $324.64B and 9.10, based on the data from Federal Reserve Statistics as of December 2022.
However, combined with the fact that it may inherit SIVB's inherent risks from startup/ Venture Capital fundings , we prefer to rate the FCNCA stock as a Hold here, due to the minimal margin of safety to our price target.
For further details see:
First Citizens: Pure Momentum - Charting New Highs And Support Ahead