Embattled regional bank First Republic (NYSE:FRC) reported a big earnings beat Monday evening, and you might have expected investors to be pleased with this news, but instead, the stock imploded.
First Republic shares have lost nearly 60% of their market capitalization over the past two trading days, as investors reacted with despair to news that First Republic suffered depositor withdrawals of 35.5% over the course of Q1.
Now that the earnings are out of the way, Wedbush analyst David Chaverini is out with a new research note analyzing the report and giving updated advice to investors.
Chaverini observes that the erosion in First Republic’s deposit base isn’t quite as bad as it first appears. On the one hand, yes, deposits shrank by about $74 billion sequentially. But on the other hand, fully $30 billion of this decline — 40% — was due to the consortium of big banks, that deposited money with First Republic to keep the institution afloat through the banking crisis back on March 16, taking back these funds because they were presumably no longer needed.
Regardless of the reason, though, those deposits are now gone. As a result, First Republic is having to borrow more money (presumably at higher interest rates than it pays its depositors) in order to get the capital it needs to keep making loans (which is how banks make money). Already, this has contracted First Republic’s net interest margin modestly, to 1.66%, and Chiaverini predicts First Republic will see “substantial” additional pressure on margins in Q2, with a “significant” negative impact on profits, despite cost-cutting measures the bank is taking (such as laying off 20% to 25% of its workers in Q2).
As a result, the analyst is increasing his forecast losses for First Republic this year — to $5.80 per share, a 55% increase over his previous prediction — and increasing his loss forecast for 2024 to $6.80 per share — a 172% increase — and adding forecast losses for 2025 and 2026 as well.
Despite acknowledging these likely losses, though, Chiaverini isn’t lowering his $8 price target on FRC shares, and remains on the sidelines with a Neutral rating. (To view Chiaverini’s track record, click here)
All in all, FRC has 15 analyst reviews, split three ways: 2 Buys, 11 Holds, and 2 Sells. So, the consensus view here is to Hold, to wait and see. Wall Street is taking the cautious stance, understanding that FRC could still recover, but that such recovery will depend in part on conditions beyond the company’s immediate control. (See FRC stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
