Given the uncertain future amid the banking crisis and macroeconomic headwinds, it could be wise to avoid troubled bank stock First Republic Bank (FRC) until its earnings release on April 24 clarifies its prospects.

FRC is a commercial bank and trust company that offers private banking, private business banking, real estate lending, and wealth management services in selected metropolitan areas in the United States. The bank operates through two segments: Commercial Banking and Wealth Management.

The recent banking crisis, which claimed Signature Bank and Silicon Valley Bank (SIVB) as casualties, also spilled over to FRC. It came under scrutiny as it had about two-thirds of its deposits in uninsured accounts, which had increased the risk of the flight of deposits due to the contagion. On March 15, S&P Global Ratings also downgraded FRC’s credit rating to junk status, citing similar reasons.

Panic-stricken depositors reacted by pulling $70 billion from the bank. In response to the fast-evolving crisis and to mitigate the risk of contagion, 11 of the largest U.S. banks, including JPMorgan Chase & Co. (JPM), placed $30 billion in deposits at FRC.

Although this coordinated rescue effort to shore up FRC led to a brief rally in its stock, it has plummeted 75.1% over the past month and 89.5% over the past six months to close the last trading session at $14.16.

While a few investors seem to be flocking to FRC with hopes of benefiting from an unexpected reversal of fortunes, with further increases in borrowing costs set to deflate asset prices, the hole in the bank’s loan book caused by unrealized losses could become larger.

Let’s take a closer look at FRC’s fundamentals.

Weak Financials

For the fourth quarter of the fiscal year that ended December 31, 2022, although FRC’s total interest and non-interest incomes increased 45.6% and 6.5% year-over-year to $1.70 billion and $263 million, respectively, its total interest and non-interest expenses increased 1017% and 6.1% year-over-year to $525 million and $919 million, respectively.

As a result, FRC’s quarterly net income available to common shareholders decreased 6% and 6.9% year-over-year to $346 million and $1.88 per share.

Profitability Has Room for Improvement

Although FRC’s trailing-12-month net income margin and Return on Common Equity (ROCE) of 28.92% and 11.56% are compare favorably to the respective industry averages of 26.65% and 11.05%, its trailing-12-month Return on Total Assets (ROTA) of 0.78% is 32.1% below the industry average of 1.15%.

Bleak Outlook

Ahead of its fiscal first-quarter earnings release this month, FRC’s revenue for the quarter is expected to decline 20.1% year-over-year to $1.11 billion. The bank’s EPS is expected to come in at $0.51, down 74.5% year-over-year.

FRC’s revenue and EPS for the fiscal year 2023 are expected to decline 40.4% and 89% year-over-year to $3.50 billion and $0.90 per share, respectively. However, concerns regarding these bearish estimates are dwarfed by question marks regarding FRC’s future as a stand-alone bank.

POWR Ratings Reflect Weakness

FRC has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. FRC has an F grade for Sentiment, consistent with its bleak outlook.

Moreover, FRC has D grades for Quality and Stability, in sync with its not-so-impressive profitability and a 60-month beta of 1.15, respectively.

Unsurprisingly, FRC is ranked last among 10 stocks in the F-rated Money Center Banks category.

Beyond what has been discussed above, additional ratings for the Growth and Momentum of FRC can be found here.

Not out of the Woods Yet

Although the March 16 announcement by Federal Regulators that 11 banks have given FRC their vote of confidence by depositing $30 billion in the bank was soon followed by news that JPM CEO Jamie Dimon was leading discussions with chiefs of other big banks about a new effort to stabilize FRC, the bank doesn’t seem to be off the hook just yet.

On April 7, FRC announced that it would be suspending payments of quarterly cash dividends on its preferred stock “as a measure of prudent oversight.” Moreover, the bank has said that the right of holders to receive dividends is “noncumulative,” which implies that investors are not eligible for payment at a later date should the bank resume payments.

This came shortly after FRC decided to suspend dividends on its common stock to conserve capital.

In addition, FRC’s top executives selling millions of dollars of the company’s stock in the two months before the bank’s shares plummeted, and the bank paying millions of dollars to family members of its founder James Herbert for work done in recent years has not helped shore up confidence regarding its prospects and governance.

Bottom Line

In view of its weak fundamentals and uncertain prospects, it could be wise to keep a safe distance from FRC’s stock ahead of the bank’s earnings release.

Stocks to Consider Instead of First Republic Bank (FRC)

Beyond potential short squeezes, unfortunately, the odds of Nikola Corporation delivering sustained risk-adjusted returns seem greatly compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three B-rated (Buy) bank stocks instead:

Banco Bilbao Vizcaya Argentaria, S.A. (BBVA)

Deutsche Bank Aktiengesellschaft (DB)

Société Générale Société anonyme (SCGLY)

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FRC shares were trading at $14.16 per share on Tuesday afternoon, down $0.00 (0.00%). Year-to-date, FRC has declined -88.36%, versus a 7.89% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...

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