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First Republic Bank (FRC) Rides on Loans & Deposits, Costs Up

First Republic Bank’s FRC consistent revenue growth and strong balance sheet position will support financials. However, rising expenses pose a concern for the bank.

FRC’s net interest income (NII) witnessed a compound annual growth rate (CAGR) of 18% over the last four years (2018-2021). The growth was mainly driven by improving average interest earning assets. Further, in the same time frame, non-interest income recorded a 19.2% rise. Thus, the steady growth of NII and fee income keeps strengthening the top line.

Further, the bank has been recording solid growth in loan balances with a three-year (2019-2021) CAGR of 22%, whereas deposits witnessed a CAGR of 31.7%. Management expects loan growth in the high-teens range for 2022 and the mid-teens range for next year. Moreover, First Republic’s adoption of a new core banking system to expand the client base, diversified deposit funding and strong loan pipeline will support the balance sheet strength.

As of Jun 30, 2022, FRC had total debt worth $12.3 billion and cash and cash equivalent worth $6.2 billion. Its times interest earned ratio improved over the last few quarters. The company has investment-grade corporate long-term credit ratings of A1, A- and A- from Moody’s, Standard & Poor’s and Fitch, respectively. Hence, the above favorable factors show that the bank can withstand any uncertain economic crisis.

Shares of this Zacks Rank #3 (Hold) company have declined 19.6% compared with a 11% decrease recorded by the industry over the past year.

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However, operating costs have been rising at a CAGR of 18% over the last four years (2018-2021). FRC has been continuously investing in franchise expansion, including additional hiring, to support growth and information system initiatives. These efforts might benefit the bank in the long run but will keep the bottom line under pressure in the near term.

FRC’s net interest margin (NIM) contracted from 2013 through 2021 due to a decline in long-term yields relative to short-term yields and a near-zero interest rate environment. NIM growth is expected to remain relatively flat in the near term as funding costs rise. Per management’s anticipation, NIM will be at the high end of 2.65-2.75% in 2022.

Banks to Consider

A couple of better-ranked bank stocks are CVB Financial Corp. CVBFand First Hawaiian, Inc. FHB. Currently, both CIVBF and FHB carry a Zacks Rank # 1 (Strong Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

CVB Financial’s current-year earnings estimates have been revised 4.4% upward over the past 30 days. CVBF’s shares have gained 32.4% over the past year.

The consensus estimate for First Hawaiian’s current-year earnings has been revised 5.7% upward over the past 30 days. Over the past year, FHB’s shares have lost 5.6%.


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