First Republic Bank’s Stock May Be Too Rich For The Market To Handle

(As featured on Seeking Alpha- August 21, 2017)

Written by: Chris B. Murphy

First Republic missed its EPS and revenue targets for the quarter.

However, the bank posted solid deposit growth of 8% and loan growth of 11% for the first half of the year.

The valuations are high, and if the bank continues to miss its earnings targets, the stock may face a corrective move.

In this second article of a two-part series, we’ll compare and analyze the financial ratios and the valuations of First Republic Bank (FRC) following its earnings reports for Q2.

The stock price for First Republic Bank is up over 40% in the past year, and the appreciation has been driven primarily by solid net interest income growth, growth in loans and deposits, and growth in fee income or non-interest income. As a result, the valuations of the bank have risen along with its stock price, and it’s these elevated valuations that we’ll analyze in this article.

We’ll also compare FRC to its peers, including M&T Bank (MTB), KeyCorp (KEY), Huntington Bancshares Incorporated (HBAN), Zions Bancorporation (ZION), Citizens Financial Group (CFG), Regions Financial Corporation (RF), and Fifth Third Bancorp (FITB).

Highlights from the earnings report:

  • Revenue came in at $641M, which was up by 19.19% y/y, which missed estimates y/y by $25.32M.
  • FRC posted an EPS of $1.06 which missed estimates by 3 cents for the quarter.
  • Loan originations were $7.3 billion for the quarter and deposits increased to $63.3 billion, up 23.7% compared to a year ago.
  • The Bank grew net interest income by 20% y/y and non-interest income by 17%, and those numbers saved the quarter for FRC. For my income analysis on FRC, please click here for my earlier article.

Although First Republic posted impressive deposit growth y/y and net interest income growth in a low yield environment in Q2, the bank missed its revenue and EPS estimates. The stock price has held up, thanks in part to that solid income growth and an above average ROE. Although a slight retracement is underway for the stock, with the rich valuations, low yields, and an elevated price, FRC is at a serious risk of a major pullback of another 10%.

Find the link to the full story below: