First Republic (FRC) is an American financial services firm with an emphasis on regional banking and high net-worth wealth management.
I am bullish on the stock.
Regional Banks Are In a Good Spot
The big difference between regional banks and multinationals is the predictability of risk. The global FX markets aren’t the easiest to forecast right now because of the lack of homogeneity in policy setting.
This doesn’t mean that big banks will do poorly; it just means we can back out currency risk in our analysis and also focus on U.S. economic conditions to predict the stock’s outcome instead of considering the global economy.
The U.S. Federal Reserve’s policy for 2022 seems to be a 3x rate hike, which could see banking stocks soar. The reason why banking stocks benefit from rate hikes is due to the excess spreads they’re able to charge on loans, which will likely lead to higher profitability.
First Republic runs a simple business model, with approximately 83% of its revenue deriving from interest-bearing activities. The bank runs a low-risk loan portfolio, which could be another positive add-on here as delinquency rates likely won’t be affected as we exit expansionary monetary policy.
Passing Its Stress Test with Flying Colors
I’d argue that a bank’s stress test is 50% of what drives a banking stock’s short-term performance. Banking stock investors love looking at capital adequacy, assets on the balance sheet, managerial changes, earnings, liabilities, and sensitivity to events.
The Basell III stress test is the focal point to all of the mentioned components, and First Republic’s stress test results in the third quarter were terrific.
When measured in September, the bank’s tier 1 equity requirement exceeded the required benchmark by 2.18x, and total capital also exceeded its requirement by 1.68x.
Wall Street’s Take
Turning to Wall Street, according to TipRanks’ tool analysts are generally bullish, with a Moderate Buy consensus rating. The average First Republic price target on the Street is $230.33, representing 14% in upside potential.
Concluding Thoughts
Regional banking stocks could be an excellent alternative to those who are wary of global policy uncertainty. First Republic’s prospects seem bright amid terrific stress test results.
In addition, there’s a strong possibility of its loan portfolio outperforming the sector, which could lure investors during a cyclical upturn for financial stocks.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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