2023-03-27 11:46:18 ET
Summary
- The FDIC, First Citizens Bank, and SIVB have crafted a deal.
- First Citizens Bank will take over SIVB's branches and a portion of its assets.
- This deal should eventually be a good one for First Citizens Bank.
Article Thesis
First Citizens Bank ( FCNCA ) has agreed to buy out troubled Silicon Valley Bank's ( SIVB ) deposits and loans in a deal that was brokered by FDIC.
The market reacted very positively to this deal, sending First Citizens Bank's shares soaring by more than 40%. While the deal included a substantial discount to the par value of these assets, it's primarily a great deal for those who bought FCNCA prior to the news being released. At the new price, FCNCA is not a similarly great deal any longer.
What Happened?
The FDIC has crafted a deal between First Citizens Bank and Silicon Valley Bank that will see the former acquire around $72 billion worth of assets from the latter at a meaningful discount. The announcement of this deal sent FCNCA's shares soaring, at the time of writing they are up 47% to more than $850.
And indeed, the deal looks favorable for First Citizens Bank. FCNCA will acquire these assets at a roughly 23% discount, or $16.5 billion below par value. In theory, this should be substantially accretive for FCNCA's profits and book value, which is why the positive market reaction is not too surprising.
Not all of Silicon Valley Bank's assets will be sold in this deal, however. Instead, around $90 billion worth of securities and other assets will remain at SIVB, where the FDIC will likely monetize them over time in order to pay back depositors of the failed bank.
Silicon Valley Bank's former 17 branches will be made into new branches of First Citizens Bank, which will increase the latter's geographic reach and penetration substantially, which should have size and scale advantages down the road once integration has been completed, e.g. due to lower overhead expenses on a per-branch basis, which should be beneficial for First Citizens' profitability.
To make things more complicated, the FDIC also will receive appreciation rights related to First Citizens Bank's common shares. These will have a potential value of as much as $500 million, depending on FCNCA's stock performance.
On top of that, there's also a loss-sharing agreement between First Citizens Bank and the FDIC related to potential commercial loan losses. This was, according to the press release, thrown into the deal in order to smooth things out and to prevent potential further disruptions to the banking sector.
First Citizens Deal For SIVB Assets: Who's The Winner?
From what we know today, it looks like First Citizens Bank is the clear winner in this deal. The bank will pick up additional branches that will expand its reach, while FCNCA also will pick up a large amount of deposits that will increase its sources of cash and that will allow the bank to increase its loan-making going forward.
On top of that, FCNCA will acquire a large amount of assets for a steep 20%-plus discount. It seems likely that the assets that FCNCA will buy in this deal are the higher-quality ones among the assets SIVB used to own - First Citizens likely wouldn't be interested in acquiring the worst stuff on SIVB's balance sheet. When a bank, in this case FCNCA, is able to acquire (presumably) high-quality assets well below par, that naturally is beneficial for the bank's future profitability, and it should also impact First Citizens Bank's book value positively. The positive market reaction to this deal, at least when it comes to First Citizens' stock, thus makes sense, although one can of course argue whether the current 47% stock price jump is justified - over the coming quarters, it may turn out that the deal is not as accretive as initially thought, or it might turn out to be an even better deal relative to what the market is pricing into FCNCA's stock right now.
While First Citizens Bank is a winner in this deal, the FDIC will lose a significant sum of money due to the SIVB failure. According to the press release linked above, this is what FDIC losses could look like:
The FDIC estimates the cost of the failure of Silicon Valley Bank to its Deposit Insurance Fund to be approximately $20B... The exact cost will be determined when the FDIC terminates the receivership.
While $20 billion worth of losses does not seem very large for the whole US banking system which has around $23 trillion worth of assets - the ratio is less than 0.1% - the loss seems quite meaningful relative to the FDIC's resources. According to its official website , the FDIC had $128 billion at the end of the fourth quarter of 2022, thus the SIVB failure will eat up around 15% of the FDIC's resources. In other words, it would take five more bank failures of a similar size compared to what happened at Silicon Valley Bank, and the FDIC would be more or less out of money. It is of course not guaranteed that this will happen. In fact, it doesn't even seem likely, I believe, as the Fed has provided additional liquidity for the banking system and since most banks managed their risks better than SIVB did. But still, the SIVB-related losses for the FDIC seem pretty meaningful.
The impact on SIVB's equity investors is not fully known yet. But the fact that a large portion of SIVB's assets was sold at a huge discount to par value could indicate that the bank's equity will shrink dramatically as the current troubles are cleared up. This does especially hold true when the assets that FCNCA bought are the higher-quality ones - in that case, the assets that remain on SIVB's books will likely suffer even more. SIVB had a book value of around $12 billion at the end of the most recent quarter - I would not be surprised if actual equity value shrinks to zero as the issues at SIVB are cleared up.
Is First Citizens Bank A Buy?
It seems pretty clear that the deal that First Citizens Bank has crafted will be beneficial for the Raleigh, NC, based bank. But that does not automatically make First Citizens Bank a buy at the current price. First, the market started to price in the tailwinds of this deal very quickly, and FCNCA is now trading well above the prices seen prior to this deal announcement. In fact, FCNCA was trading as low as $506 over the last couple of weeks, the current price of around $850 is around 70% higher than the lows we have seen not too long ago. It's not guaranteed that the positive impact of this deal will justify a rally this pronounced, although it is possible, of course.
First Citizens Bank's dividend yield had been rather low prior to this deal, and it's even lower today, at around 0.3%. Since many other banks offer much higher dividend yields of 3%, 4%, 5%, or even more, First Citizens Bank is far from attractive from an income investor's point of view.
This does not mean that First Citizens must be a bad investment at current prices - it could be a good one, but since the market is now already pricing in considerable benefits from this deal, I do not believe that FCNCA will automatically be a winning investment from the current prices.
Takeaway
The deal between First Citizens Bank, the FDIC, and SIVB looks very good for FCNCA at first sight. But we won't know the actual impact on the bank's results for now. Since the market has already seen FCNCA's shares soar, I do not see it as a strong buy for now, although the deal most likely will be great for those that bought into FCNCA prior to the deal's announcement, when its share price was still way lower.
For further details see:
It's A Deal: First Citizens Buys Silicon Valley Bank