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Ratings of First Republic Bank FRC have been affirmed by Moody's Investors Service. First Republic’s long- and short-term deposit ratings have been affirmed at A1/Prime-1, while its baseline credit assessment (BCA) has been affirmed at a3. The outlook remains stable.
Reasons Behind Ratings Affirmation
Per Moody’s, the company’s main strength is its financial performance, stable capitalization, profitability and robust deposit funding. However, its significant exposure to commercial real estate (“CRE”) loans remains a concern.
The bank’s stable financial performance, particularly strong asset quality, is supported by its ecology sustained business model focused on banking affluent households in addition to commercial businesses. The strong asset quality is the result of First Republic’s minimal net charge offs and very low non-performing assets. According to the rating agency, these lending strategies are likely to strengthen the bank’s financials further.
Per Moody’s, First Republic’s capitalization will be maintained by its capital generation, limited shareholder payouts, and issuance of common equity. The bank added roughly $332 million in March 2021 in common equity supporting its tangible common equity (TCE) ratios. Further, the company’s Moody's-adjusted TCE as a percentage of risk-weighted assets declined in recent years. In fact, Moody’s is of the opinion that in the long run, despite rapid loan growth, the company is likely to have a favorable capitalization.
The strong deposit base is the result of First Republic’s low reliance on material amount of confidence-sensitive wholesale funding and thus is leading to limited refinancing risk. The company’s deposit growth has outpaced loan growth by 1.1 times in 2020. Per the rating agency, the bank will continue to grow its core deposit base and preserve its strong funding position.
However, First Republic’s major challenge has been its high concentration of CRE loans, per the rating agency. The CRE portfolio was nearly 2.4 times TCE base as of year-end 2020 — among the highest of Moody's rated U.S. banks. As CRE and lending exposures are more sensitive to the effects of the coronavirus pandemic, high level of exposure to such loans could be a concern if the economic situation deteriorates.
Factors That Might Lead to Ratings Upgrade or Downgrade
An improvement in capital position and profitability given the deposit funding could lead to upgrade of the bank’s standalone BCA and ratings. Meanwhile, ratings could be downgraded if the ratings agency finds the company loosening its underwriting standards or expanding into new lending products or geographies. Weakening capitalization can be another reason for downward rating pressure.
Price Performance & Zacks Rank
Shares of First Republic have gained 60.7% over the past six months, compared with the industry’s rally of 92.9%. The stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Similar Action by Moody’s on Other Banks
In first-quarter 2021, Moody’s affirmed the ratings for several banks, which include Washington Federal, Inc. WAFD, Old National Bancorp ONB and Fulton Financial FULT. Moreover, all the three bank’s outlook remained unchanged at stable.
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