2023-06-13 14:35:41 ET
Summary
- We highlight the merits of the SVB acquisition.
- We touch upon the short-term outlook of the bank.
- We close with some thoughts on the valuations and the technicals.
Introduction
The stock of North Carolina-based First Citizens BancShares (FCNCA) has been one of the big success stories in the regional banking universe this year. Not even half a year has gone by, yet FCNCA has already managed to deliver handsome returns of ~68%. FCNCA's commendable return profile looks even more poignant when you consider how poorly its peers from the regional banking space have fared (the KRE ETF is down by ~25% YTD).
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The SVB Acquisition Looks Like A Good Fit
Admittedly, FCNCA's outperformance this year is largely driven by its acquisition of Silicon Valley Bank (SIVBQ). Most stakeholders in this counter are understandably buoyed by the immediate accretion that could come through; the aggregate tangible book value goes up by 100% , even as the EPS could surge by 65-89%.
However, we also feel there are other long-term structural changes worth highlighting.
Firstly, there's a useful tilt in geographic diversification. FCNCA's expertise lies in the SouthEast (North Carolina alone accounted for 40% of the deposit base in FY22), Mid-Atlantic, Midwest, and Western US markets, whereas SVB is predominantly based in the North East and West Coast markets. Then there's the improving texture of the funding base. Prior to the acquisition low-cost non-interest-bearing deposits only accounted for 29% of the deposit base, post-acquisition it will account for the largest share of funding at 39% and will be instrumental in bringing down the overall cost of funding over time.
On the asset front, FCNCA was previously heavily exposed to the plain vanilla retail and wealth segments (42% of the loan book), but that share will almost halve, even as it garners fresh exposure to high-growth terrains such as tech, life sciences, healthcare, private equity and venture capital (aggregate share of 37% for all these sectors). The other crucial thing to note is that the overall loan portfolio of SVB that FCNCA acquired, has traditionally enjoyed a low credit loss history so this is unlikely to be inimical to FCNCA's strong risk management culture.
Short-Term Outlook Of FCNCA
With regards to the short-term outlook of FCNCA, let's first touch upon the net interest margin ((NIM)) trajectory, which is unlikely to stay too buoyant despite getting an uplift from the SVB Acquisition (in Q1, this acquisition contributed $65m). FCNCA is now facing pressure from a higher cadence of deposit betas which will leave their mark over the next two quarters. For the uninitiated, the deposit beta gives you a sense of how quickly a bank passes on policy rate hikes to its deposit base. As this increases, it dampens the positive impact of loan growth, investment portfolio growth, and the overall higher yield on the asset base. In Q1, the deposit beta of FCNCA rose to 22% but this will continue to trend up over the next two quarters (28% in Q2 and 31% in Q3) thus stunting fluid topline progression.
Investors also need to consider that FCNCA, like most other regional banks, is unlikely to be too enthusiastic about growing its asset base, particularly considering the uncertain economic environment. We can see that the growth in commercial loans across the system has slumped to low single-digit levels in recent periods.
Loan growth appetite will also be tapered as there are signs that the existing asset base (including what it acquired from SVB) appears to be turning sour. In Q1, FCNCA's net charge-offs and the associated ratio (0.27x) doubled in just three months, and in Q2, management believes that NCO ratio could increase even further, up to levels of 0.45%.
Q1 Presentation
FCNCA's capital levels are one of its greatest merits (currently all the important ratios are above the target range), and the board and management can help tilt positive sentiment even further, by putting some of the excess funds to good use. Since FCNCA has already been busy on the inorganic front, we believe it would be a good opportunity to recommence a share buyback program. For context, even though FCNC's previous buyback program (the repurchase of 1.5m Class A shares) was supposed to extend till July 28 2023, they managed to complete it by the end of last year. As things stand, there is no buyback plan on the anvil, but we won't be surprised to hear an announcement around the Q2 earnings event.
Q1 Presentation
Closing Thoughts - Valuation And Technical Narratives
Even though there's a lot to like about the SVB acquisition, and some degree of re-rating is acceptable on account of this, it is also worth pondering if the valuations of FCNCA have been bid up a tad too much, particularly considering the hazy short-term outlook.
At the end of last year, FCNCA was managing an asset base of $110bn ; after the acquisition its aggregate asset base crossed the $200bn mark, and currently stands at $214bn. This incidentally puts it amongst the top-5 regional banks, but its management of assets is still a long way off the likes of PNC Financial Services ( PNC ), U.S. Bancorp ( USB ), and Truist Financial Corporation ( TFC ), all of whom have asset bases of over $560bn to $682bn.
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Despite this significant gap in the asset base from its larger peers, FCNCA is priced at a forward P/E of 8.2x, well above the likes of USB ( 7x ) and TFC ( 7.2x ). Only PNC is priced higher at 9.2x.
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The other thing that investors may want to consider is that by FY25, the sell-side expects a decline in the annual EPS of FCNCA by -20% YoY ($143). Well at those levels, you're looking at an even pricier P/E multiple of close to 9x.
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After surging up since late March, the recent price imprints on FCNCA's daily chart show that the stock has been range-bound (between 1220-1345) for over a month now, and is looking for a catalyst one way or the other. Investors should also be mindful of the downside gap that exists between the $1100 level and the $1175 levels. The market usually tends to bridge these gaps before pushing on. We think a pullback to the $1100 levels would represent a good area to get in, as it could likely also coincide with compression to the 50DMA. Currently, the gap between the price and the 50DMA looks too overextended and we believe that gap could narrow in the weeks ahead. FCNCA is a HOLD for now.
For further details see:
First Citizens: The Long And The Short Of It