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On Aug 14, we issued an updated report on First Republic Bank FRC. Though the company witnessed escalating expenses, it has been growing through considerable top-line strength on growth in loans and deposit balances. Moreover, decent debt level is a tailwind.
The company has been witnessing upward estimate revisions, reflecting analysts’ optimism about its growth prospects. Over the past 30 days, the Zacks Consensus Estimate for its 2020 and 2021 earnings moved 1.1% north.
First Republic’s price performance is also encouraging. Shares of this Zacks Rank #3 (Hold) company have gained 18.4% in the past three months compared with the industry’s growth of 20%.
Looking at its fundamentals, First Republic has demonstrated considerable top-line strength over the past few years. The bank’s net interest income (NII) has exhibited a five-year CAGR (2015-2019) of 16.2%. During the same time period, its non-interest income reflects growth of 15.4%, with support from a steady rise in investment management fees (accounting for 62% of fee income as of Jun 30, 2020). Notably, both continued to show strength in the first six months of 2020 as well.
First Republic recorded notable growth in loan balances, driven by increased loan origination volumes, with a five-year CAGR (2015-2019) of 19.8%. Additionally, the company’s total deposits have witnessed a CAGR of 17.1% during the same time span. Both metrics improved in first two quarters of 2020 as well. Therefore, a rising trend in loans and deposits is anticipated to continue with economic recovery.
As of Jun 30, 2020, the company had total debt worth $17.2 billion, while its cash and cash equivalents and due from banks totaled $3.1 billion. Further, time-interest-earned ratio of 4.5 has been steady for the past several quarters. Thus, given the favorable factors and record of earnings growth, First Republic has a lesser likelihood of default in interest payment and debt repayment if the economic situation worsens.
However, total expenses have flared up, witnessing a CAGR of 18.3%, over the last five years (2015-2019). Remarkably, cost savings from completed build-out of systems and processes required for crossing $50 billion in total assets are being invested into digital initiatives, including mobile banking applications and data analytics. As such, operating costs are likely to remain elevated in the near term.
Moreover, First Republic’s NIM is affected by the flattening of yield curve — a decline in longer-term yields relative to short-term yields. Since 2013, the company’s NIM has been contracting and the trend continued in the first half of 2020 as well. Notably, lower tax-equivalent yields on tax-advantaged investments and tax-exempt loans from the reduction of the federal tax rate for corporations resulted in the margin decline in 2018. Further, the Federal Reserve recently decreased interest rates to near zero, which might keep margins under pressure in the quarters ahead.
Stocks to Consider
TD Ameritrade Holding Corporation AMTD has been witnessing upward estimate revisions for the past 30 days. Moreover, this Zacks #1 Ranked (Strong Buy) stock has rallied more than 9% in the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.
E*TRADE Financial Corporation ETFC has been witnessing upward estimate revisions for the past 30 days. Further, the company’s shares have gained 32.2% in the past three months. At present, it carries a Zacks Rank of 2.
Artisan Partners Asset Management Inc. APAM has been witnessing upward estimate revisions for the past 30 days. Additionally, the stock has jumped 42.8% in three months’ time. It currently sports a Zacks Rank #1.
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