Stock Analysis & Ideas

First Republic Bank Stock (NYSE:FRC): Steep Slide is Likely to Continue

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A week or two ago, FRC stock might have seemed like a prime dip-buy for enterprising value investors. However, the share-price drawdown could persist as the $30 billion rescue package for First Republic Bank may be too little, too late.

Some big banks might try to rescue First Republic Bank (NYSE:FRC), but the steep slide will probably continue in FRC stock. I am bearish on FRC because the rescue package extended to First Republic Bank probably won’t be enough to save the company from further financial and reputational damage.

Based in San Francisco, First Republic Bank is a financial institution that got into some trouble after over-leveraging itself on government bonds, which lost value over the past year. First Republic also had too many uninsured deposits on its balance sheet.

At this point, it’s unknown whether First Republic’s reputation among skittish banking customers can be salvaged. Furthermore, a second downgrade from a highly-respected analytic firm casts First Republic Bank in a negative light. When all is said and done, this just isn’t the right time to apply a “buy low, sell high” strategy with FRC stock.

New Rescue Plan Talks Aren’t a Good Sign for First Republic Bank

After already having declined sharply since early March, FRC stock plunged an additional 47% on March 20. Clearly, First Republic’s investors were unhappy about something – or more precisely, there were two news items. One of them involved talks of a new rescue plan for First Republic Bank, which might sound like good news, but it’s actually quite worrisome.

Last week, 11 big banks, including JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC), collectively deposited $30 billion into First Republic Bank. Bear in mind, this was an uninsured deposit, not a free gift of $30 billion to First Republic. Mainly, it was intended to help the bank have enough cash available to honor the withdrawal requests of First Republic’s depositors.

Now, there are signs that the $30 billion won’t be enough. For one thing, The Wall Street Journal reported that First Republic Bank’s customers have withdrawn around $70 billion since Silicon Valley Bank collapsed. Plus, the Journal stated that JPMorgan Chase CEO Jamie Dimon is “leading discussions” with other big-bank chief executives regarding “fresh efforts to stabilize” First Republic Bank.

It’s perfectly understandable that financial traders dumped FRC stock. First Republic Bank received a $30 billion lifeline not long ago, and apparently, that wasn’t enough. As the bank’s customers witness First Republic potentially getting one bailout after another, they might decide to park their savings elsewhere.

First Republic Bank’s Credit Rating Gets Another Downgrade

The other catalyst that prompted a 47% single-day sell-off in FRC stock was another downgrade of First Republic Bank’s credit rating. It’s yet another blow to First Republic’s already tarnished reputation among bankers and investors.

Just last week, S&P Global Ratings downgraded First Republic Bank’s issuer credit rating four notches, from A-minus to BB-plus, which is commonly known as a “junk” rating. At around the same time, Fitch Ratings reduced First Republic’s credit rating from A-minus to BB and lowered the bank’s debt rating from Baa1 to B2.

S&P Global Ratings wasn’t quite finished yet, though. The analyst firm just cut First Republic Bank’s credit rating once again, this time from BB-plus to B-plus. According to the S&P Global analysts, the $30 billion rescue package extended to First Republic “may not solve the substantial business, liquidity, funding, and profitability challenges that we believe the bank is now likely facing.”

“Substantial” is the right word to describe First Republic Bank’s financial problems. Liquidity and funding issues will certainly continue to pose near-term challenges in the short term, while long-term profitability seems unlikely for First Republic Bank.

Is FRC Stock a Buy, According to Analysts?

Turning to Wall Street, FRC stock is a Moderate Buy based on seven Buys, 10 Holds, and one Sell rating. The average First Republic Bank stock price target is $130.62, implying a massive 972% upside potential. However, don’t be surprised if some downward revisions occur in the near future for First Republic.

Conclusion: Should You Consider FRC Stock?

Sometimes, analyst firms are bearish on a company, and that makes me want to buy the stock because I’m a contrarian. However, this isn’t an appropriate time to go contrarian on FRC stock.

First Republic Bank is in deep trouble, both financially and in terms of the bank’s reputation with its customers. After delving into the recent developments surrounding First Republic Bank, it’s not difficult to see why traders would sell FRC stock now and ask questions later. At the end of the day, it’s just not a good time to consider a share position in First Republic Bank.


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