First Republic Bank (NYSE:FRC) reported its earnings results earlier today, with the results showing that the banking crisis is overblown. The company beat analysts’ quarterly top and bottom-line estimates. Yet, investors furiously dumped their FRC shares in after-hours trading despite the evidently positive results. I am wholeheartedly bullish on First Republic Bank stock because the company’s capital position is as solid as anyone should expect it to be, given the circumstances.
San Francisco-based First Republic Bank is a financial institution that mainly serves high-end, big-city banking clients. Most people had never heard of First Republic Bank until March — when the company became the poster child of distressed regional U.S. banks.
It’s been well-documented that First Republic Bank received a lifeline in the form of $30 billion from mega-banks like JPMorgan Chase (NYSE:JPM). Heck, First Republic’s management even admitted this in its still-fresh quarterly earnings press release. There’s really nothing so objectionable in First Republic Bank’s results and commentary that should’ve caused investors to panic sell their shares. Yet, that’s exactly what they did.
This likely presents an opportunity for anyone with a healthy appetite for risk and a willingness to buy when other traders are losing their composure.
The After-Hours Carnage of First Republic Bank: Is It Justified?
Buy the rumor, sell the news. You’ve probably heard that old saying before, but there’s a variation that’s just as important: Buy the assumptions, sell the reality. You can witness this principle in action right now as short-term traders first overbought, then oversold FRC stock.
This is typical roller-coaster price action when traders assume beforehand that an earnings report will be largely positive. Earlier today, prior to the company’s first-quarter 2023 earnings announcement, investors pushed First Republic Bank stock up 12.2% even though it was a flat, uneventful day in the stock market. Then, in after-hours trading after the publication of the earnings report, FRC stock dropped by over 20%.
There’s a textbook lesson here: don’t assume anything about financial results beforehand, and be prepared for any outcome. Personally, I prefer to act on investment opportunities after an earnings report, not before. With First Republic Bank stock, you may have a chance to buy shares of a Street-beating bank at a steep discount.
So, here’s the lowdown. First Republic Bank’s revenue fell 16% year-over-year to $1.21 billion in Q1 2023. This really isn’t terrible, considering a headline-grabbing regional banking crisis took place in March. Besides, this result beat analysts’ estimate of $1.13 billion in revenue.
Looking at the bottom-line results, First Republic Bank reported diluted earnings per share of $1.23, which represents a significant decline compared to the year-earlier quarter’s $2 per share. Still, it should again be emphasized that this result was achieved during a full-on banking crisis. Plus, First Republic Bank handily beat Wall Street’s consensus estimate of $0.92 per share.
First Republic Bank’s Deposit Outflow Shouldn’t be Surprising
Probably, what scared so many after-hours FRC stock traders was the fact that First Republic Bank’s deposits declined sharply during 2023’s first quarter. From Reuters to the Wall Street Journal, reporters were more than happy to emphasize First Republic’s drop in total deposits, which declined from $176.43 billion in Q4 2022 to $104.47 billion in Q1 2023.
This is duly noted, but it really shouldn’t surprise anyone who’s been following the ongoing saga of regional banks: the digital bank runs, the talk of “contagion,” federal regulators and lawmakers on Capitol Hill weighing in, unfounded chatter about bankruptcies that never happened. It’s actually impressive that First Republic Bank is still standing today.
Actually, not only is First Republic still standing, but the company is in a surprisingly solid capital position. First of all, First Republic Bank observed that by mid-March, “daily deposit outflows had slowed considerably.” Moreover, First Republic’s deposit activity “began to stabilize beginning the week of March 27, 2023, and has remained stable through” April 21.
In other words, the fears of rampant bank runs were overstated, and First Republic Bank’s deposit activity is basically back to normal. Finally, here’s the statement that convinced me of First Republic’s financial stability — as of April 21, the company “had $45.1 billion of cash and cash equivalents and unused available borrowing capacity.”
Importantly, this is more than twice First Republic Bank’s “estimated uninsured deposits, excluding the $30 billion of deposits made by the large U.S. banks.” Hence, the depositors should feel secure, and, really, so should First Republic’s shareholders.
Is FRC Stock a Buy, According to Analysts?
Turning to Wall Street (though this data is likely to change soon, so be sure to check back frequently), FRC stock comes in as a Hold based on two Buys, 11 Holds, and one Sell rating. The average First Republic Bank stock price target is $84.63, implying 428.9% upside potential.
Conclusion: Should You Consider First Republic Bank Stock?
Get ready for a slew of downgrades and price-target cuts, but also form your own conclusion about First Republic Bank. Ask yourself: are First Republic’s customers really going to lose their deposits? Also, should the company’s first-quarter deposit outflow be a huge surprise?
I encourage you to consider what the experts and the non-experts have to say about First Republic Bank, and then check the data before you make any assumptions. If you can remain calm and keep your position size small, consider FRC stock while it’s down, as it could easily turn around when short-term traders realize that First Republic isn’t a failing bank, after all.
