One of the largest regional banks in the US, First Republic Bank (NYSE: FRC) has been shook by the banking crisis which led many to pull their bank deposits from smaller, regional banks and move their money to bigger banks. While larger banks like JPMorgan (JPM), Wells Fargo (WFC) and Citigroup (C) all beat earnings expectations, this could bode ill for FRC and other regional banks since it indicates a large number of deposits were withdrawn. Still, FRC’s Q1 earnings on April 24th will be crucial for the future of this bank stock.
FRC Stock News
Panicked customers withdrew $70 billion or almost 40% of FRC’s total deposits following the March bank run triggered by Silicon Valley Bank and Signature Bank’s collapse. FRC drew particular concern at this time since 68% of its deposits were uninsured. While this is a high percentage of uninsured deposits, the number was relatively low compared to SVB’s 94% and Signature Bank’s 90%.
Still the damage was done and the bearish outlook for FRC stock was enough to cause investors like Alecta – Sweden’s biggest pension fund – and Norway’s Sovereign Wealth Fund to sell shares of FRC stock. Alecta appears to have walked away with a $728 million loss after selling its entire position.
FRC is in a no doubt weaker position since it was downgraded to junk status by S&P Global Rating due to the risk of deposit outflows. Therefore it was not surprise that the extremely bearish sentiment towards FRC stock led short interest to increase significantly over the past month reaching 27.4%.
In an effort to salvage the situation FRC suspended its common stock dividends and payments of quarterly cash dividends on its preferred stock. Canceling its dividends will allow FRC to increase its capital since the bank paid nearly $348 million in dividends last year. Even some of the bank’s executives have elected to cancel their annual bonuses for 2023. But despite these efforts to conserve capital, many investors remain unconvinced that the bank could recover.
Still, there are a few reasons investors have chosen to go long on FRC stock.
Jamie Dimon & FRC Stock
For one thing, the 11 largest banks in the country have joined forces in an initiative led by JPMorgan’s CEO Jamie Dimon, to save FRC by depositing $30 billion in the bank. With each bank depositing $5 billion as uninsured deposits, it appears that Dimon and other banking executives are hoping to restore confidence in FRC.
Investors might be wondering why Dimon has become FRC’s white knight and while its impossible to know the mind of JP Morgan’s CEO, this isn’t the first time he’s saved banks in crisis. During the 2008 financial crisis, Dimon saved Bear Stearns and Washington Mutual but he reportedly regretted this decision later on. Despite this, he is working to instill confidence in the banking system yet again by attempting to save First Republic Bank.
Considering that FRC would be an unlikely acquisition for JPMorgan since the regional bank does not have much to offer a powerhouse like JPMorgan – especially now that most of its world-class team of advisors have walked away – Dimon’s interest in the bank likely has more to do with preventing a confidence crises throughout the banking system.
As is, FRC has reported a cash position of $34 billion excluding $30 billion in deposits from these 11 banks. It has also increased its Federal Reserves borrowings from $20 billion to $109 billion at a rate of 4.75% – a sign that Federal Regulators are confident enough in FRC that it has been allowed to significantly increase its borrowings.
First Republic Bank Outlook
Long-term, FRC has secured greater stability thanks to the Fed’s new Bank Term Funding Program which is intended to provide emergency liquidity to banks like FRC. Until now, FRC was regarded as a very stable bank with an excellent asset quality history thanks in part to its customer base. Historically, most of its loans have been secured with real estate as collateral and FRC’s securities are mainly government-backed securities or investment-grade bonds. Since these investments are considered safe, this could help restore confidence in FRC long-term.
Although customers’ faith in the bank may have been shaken by this crisis, FRC also has a notable history of customer loyalty and satisfaction boasting a historical 2% customer attrition rate – far lower than the industry average of 8%. Additionally, FRC has a net promoter score of 80. This measurement of customer loyalty and satisfaction is considerably higher than the industry average of 34.
Prior to the crisis, FRC reported a total risk-based capital ratio measuring the bank’s capital in relation to its risk-weighted assets, of 12.6%. While this was above the required minimum ratio of 8%, FRC has since seen significant deposit outflows which would affect the bank’s capital adequacy. On one hand, the higher ratio indicates that FRC was potentially in a better position to weather the storm but depending on the severity of the outflows its ratio may now be well below the required minimum – indicating the bank is now in a poor position to handle its losses.
Overall, the cash injection from the nation’s leading banks and support from the Fed’s Bank Term Funding Program have likely solved short term liquidity issues for FRC. However, the market sentiment has yet to recover as illustrated by the Regional Banking ETF’s drop back to November 2020 levels.
As for FRC’s situation specifically, the bank will need to shrink its balance sheet – hopefully selling some of its assets without taking a significant loss. Some investors are hopeful that FRC will be able to shrink its balance sheet naturally when some of its loans turn over by the end of the year.
Still, FRC will likely see changes in the amount of interest it earns on loans compared to the amount of interest it pays on deposits. The difference between both of these is an indication of a bank’s profitability, but in FRC’s case its Net Interest Margin – which was around 3.5% for banks in 2019 – may be negative. This would indicate that FRC is losing more money than it makes on its own investments.
Because deposits from bank customers provide the bank with the liquidity necessary to make long-term investments, if customers have lost confidence in FRC it could be fatal. Additionally, FRC still has unrealized losses on debt securities and it will be exposed to more risk if the Fed continues raising interest rates due to its large portfolio of fixed-rate loans and fixed-rate securities. While the Bank Term Funding Program appears to be a way for banks like FRC to avoid loss realization on its held-to-maturity securities, FRC will still be in a tough situation.
Despite this, if FRC is able to survive the next few years, there could be significant upside for its stock price. Prior to the crisis, FRC had increasing net profit, operated above capital requirements, and its nonperforming assets were near all-time lows as of December 2022.
Overall, if FRC is able to maintain its relationships with customers and offer services that are “sticky” in that customers would be less likely to move their accounts elsewhere there could be renewed customer confidence.
Another silver lining its that FRC lowered the interest rates on certificates of deposits. The bank stopped offering 4-month deposits at the rate of 4.75% and 7-month deposits at the rate of 4.95%. Currently, its highest interest rate on deposits is only 4.65% which could be a sign that FRC is no longer being under the same pressure to gain capital as it was previously.
FRC Stock Q1 Earnings
FRC is set to release its Q1 2023 earnings on Monday, April 24th, 2023. This will be the bank’s first earnings following the banking crisis and will provide investors with some insight into how badly FRC was impacted by the crisis. FRC is expected to report an EPS of $0.51 and revenues of $1.1 billion
If the deposit outflows reported in these earnings are lower than investors fear, FRC stock could surprise the market and rally on the unexpectedly good news. However, if FRC reports dangerously high outflows – which is possible considering national banks’ earnings beat in recent weeks – FRC stock will likely fall to a new low.
FRC Financials
Looking into FRC’s 2022 annual report, the bank had $212 billion in assets, including $166 billion in loans. FRC had $195 billion in liabilities including $176 billion in deposits. Looking into FRC’s revenues, the bank reported $5.7 billion in revenues. Finally, the bank’s operating expenses were $3.6 billion and it reported $1.6 billion in net income.
Media Sentiment
@TheMattOMalley believes the $30 billion uninsured deposit in FRC should help restore confidence
@ZimermanErik believes that while FRC’s upcoming earnings will be a catalyst in either direction
Technical Analysis
Looking at the five minute timeframe, FSR stock recently spiked up 14% after Western Alliance (WAL) reported its earnings. The regional bank had also fallen under scrutiny during the banking crisis but its report that deposits increased by $2 billion since the end of Q1 is a bullish sign for FRC stock.
The stock appears to have formed a bull flag but the body of the flag was formed during AH and PM therefore the pattern may not be a strong indicator. FRC stock is currently trading above the 200, 50, and 21 MAs which is another bullish sign.
Looking at the indicators, the RSI is at 54 and the MAs appear to be drawing together for a death cross. Fundamentally, FRC’s main catalyst is its upcoming earnings which will likely be a deciding factor for the stock. Its earnings report could be an opportunity for investors to go long after evaluating the health of the company, but in the case that FRC report shows that the company is in worse condition than expected, the stock will likely break its all time low of $11.52.
FRC Stock Forecast
While the banking crisis appears to have been averted, the shocks to the banking system likely have not settled. Investors received mixed signals from big banks’ earnings which signaled that customers moved their deposits to larger banks in droves, yet Western Alliance’ report indicates that the situation may not be as bearish as some expected.
With short-term liquidity concerns generally abated and FRC is taking action to preserve capital by suspending dividends and increasing its federal reserve borrowing, FRC could be positioned to weather the storm. Moreover, the bank was granted a lifeline thanks to the $30 billion in uninsured deposits from some of the nation’s largest banks.
With investors both bearish and bullish on FRC stock, the company’s upcoming Q1 earnings call will be an important catalyst to watch as it gives an indication of the bank’s future. However bullish investors could take the opportunity to take a long position on the stock hoping for a gradual recovery for this regional bank.
*The writer of this article holds a long position in FRC at the time of this article.
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