Rising Costs Might Hurt First Republic Profits: Time to Sell?

First Republic Bank’s FRC profitability is expected to be hampered to some extent in the near term due to persistently rising expenses. Moreover, the company's shrinking net interest margin makes us apprehensive.

The Zacks Consensus Estimate for its current-year earnings moved 5.4% south over the past 30 days, reflecting analysts’ lack of optimism regarding its earnings growth potential.

First Republic’s price performance is also not encouraging. Shares of the company have lost 30.7% so far this year compared with the industry’s decline of 38.3%.

Looking at its fundamentals, total expenses have flared up, witnessing a CAGR of 18.3%, over the last five years (2015-2019). Notably, 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.

Management expects efficiency ratio to be between 63.5% and 64.5% in 2020. First-quarter 2020 efficiency ratio is expected to be higher due to the seasonal impact of payroll taxes and benefits.

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 prevailed in 2019 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 margin contraction in 2018. Further, the Federal Reserve recently slashed interest rates to zero, which might keep margins under pressure in the quarters ahead.

Nevertheless, solid growth in loans and deposits balance is expected to aid revenues. Moreover, the company’s steady growth in both net interest income and fee income will likely support growth over the long run.

Notably, the company currently carries a Zacks Rank #4 (Sell).

Stocks to Consider

Northrim BanCorp Inc NRIM has witnessed upward earnings estimate revisions for 2020 over the past 90 days. Also, this Zacks #1 Ranked (Strong Buy) stock has lost around 29.7% over the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

First Western Financial, Inc. MYFW ongoing-year earnings estimate moved up in the past 90 days. Further, the company’s shares have declined 17.2% over the past six months. At present, it sports a Zacks Rank of 1.

Flushing Financial Corporation FFIC current-year earnings estimate moved north in 90 days’ time.  Additionally, the stock has depreciated 32% over the past six months. It currently carries a Zacks Rank #2 (Buy).

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First Republic Bank (FRC) : Free Stock Analysis Report
 
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