Will recent bank failures lead to contagion, or will the problem be contained? Speculative investors can bet on First Republic Bank (NYSE:FRC) if they’re expecting a happy ending to the current crisis. However, I am neutral on FRC stock because it’s highly risky and only appropriate for a tiny lottery-ticket position.
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San Francisco-based First Republic Bank is a financial institution that primarily caters to high-end, big-city banking clients. The company flew under the radar in the financial media until recently. Then, SVB Financial Group (NASDAQ:SIVB) subsidiary Silicon Valley Bank (SVB) imploded, and everything changed for the banking sector and First Republic Bank, in particular.
Regulators shut SVB down on Friday, and some depositors feared that there would be a run on the banks. The fallout from the SVB fiasco includes collateral damage, and First Republic Bank and its shareholders are sitting on heavy losses at the moment. However, there just might be an opportunity amid the ruins. The question is: are you really willing to bank on a comeback with First Republic Bank?
FRC Stock Collapses, Again
Regional bank stocks are sometimes considered to be a fairly safe bet. Sure, local banks fail from time to time, but it’s not a common occurrence — or at least, it wasn’t until recently. Suffice it to say, then, that the collapse-upon-collapse of FRC stock has been rare, alarming, and nothing short of spectacular.
Believe it or not, First Republic Bank stock declined around 62% on Monday after already having lost substantial value on Thursday and Friday of last week. Amazingly, FRC stock fell from $115 to $31 in several days. While this magnitude of volatility is happening, investors might not be able to assign a meaningful P/E ratio to First Republic Bank, and it’s hard to know whether the company’s 3.5% dividend yield is reliable.
Still, value hunters and contrarians might be tempted to go on a dip-buying expedition with FRC stock. After all, you’re supposed to buy when there’s blood in the streets, right? Besides, as of this writing, there aren’t any indications that regulators have shut down First Republic Bank as they did with SVB. Just maybe, FRC stock is still really a $100+ stock disguised as a $30-ish stock. Could it be?
First Republic Bank Reassures its Stakeholders
It might have been the understatement of the year. “In light of recent industry events, the last few days have caused uncertainty in the financial markets,” First Republic Bank founder Jim Herbert and CEO Mike Roffler observed in a recent statement. Investors are already aware of this, and the billion-dollar question is whether the company can continue and succeed as a going concern.
Fortunately, there are reasons to believe — though there are no guarantees, of course — that First Republic Bank may weather the crisis. On Sunday, First Republic Bank stated that it “has further enhanced and diversified its financial position through access to additional liquidity from” the U.S. Federal Reserve Bank and JPMorgan Chase (NYSE:JPM).
Consequently, First Republic Bank’s had $70 billion worth of “total available, unused liquidity to fund operations.” That figure, furthermore, doesn’t include “additional liquidity,” which the company “is eligible to receive under the new Bank Term Funding Program announced by the Federal Reserve.”
This doesn’t necessarily mean that everyone should invest in First Republic Bank right now. Reportedly, 67% of First Republic Bank’s total deposits were uninsured at the end of last year, and it’s understandable if this is a deal-breaker for some cautious investors.
In any event, First Republic Bank’s management insists that the company remains well-capitalized and financially sound. “First Republic’s capital and liquidity positions are very strong, and its capital remains well above the regulatory threshold for well-capitalized banks,” Herbert and Roffler declared.
Is FRC Stock a Buy, According to Analysts?
Turning to Wall Street, FRC stock is a Moderate Buy based on nine Buys, nine Holds, and one Sell rating. The average First Republic Bank stock price target is $142.69, implying a whopping 357% upside potential.
Conclusion: Should You Consider FRC Stock?
It’s a tough call here, to be honest. Certainly, it’s alarming that so much of First Republic Bank’s deposits were uninsured last year. On the other hand, it’s reassuring that the company has the backing of the Federal Reserve Bank and JPMorgan Chase.
It’s possible, then, for speculators to consider buying a few shares of FRC stock because it’s trading at a drastically reduced price. At the same time, it’s perfectly understandable if more cautious investors choose to stay far away from First Republic Bank and seek other financial stocks.
