FRC stock price analysis: does the reward outweigh the risks?

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First Republic (NYSE: FRC) stock price has moved sideways in the past few days even after the company suspended its preferred dividends. The shares have remained at $14.16 ahead of the upcoming quarterly earnings report. They have crashed by more than 93% from the highest point in 2021. 

Difficult but logical decision

The biggest banking news this week was the decision by First Republic Bank to suspend dividends of its preferred stock. This was bad news to investors who have seen their shares dive by more than 90% in the past few years.

But it was also a logical idea considering that the company has faced significant pressure in the past few days. According to the WSJ, the company has lost over $70 billion of deposits following the collapse of Silicon Valley Bank and Signature.

The main challenge for First Republic is that, like SVB, most of its customers have more than $250,000 in deposits. As such, most of them rushed to withdraw their funds and move them to other large companies like Bank of America and JP Morgan.

However, these risks have been abated by the decision by the government to backstop these deposits. Another challenge for First Republic is that it has huge unrealized losses. This simply means that it holds billions in long-term bonds that are yielding less than what it paid for. 

Most importantly, First Republic has exposure to the troubled commercial real estate sector. In the last report, the company said that its real-estate secured mortgages were $117 billion by December 31st. That was lower than the $136 billion balance sheet value.

In the long run, First Republic faces a tough road ahead as it deals with capital flight and tougher regulatory scrutiny. This explains why most analysts, including from Wells Fargo, Argus, Atlantic Securities, Compass Points, and Raymond James among others have downgraded the stock.

Is FRC stock a good buy?

FRC stock chart

FRC stock price has become incredibly cheap as fears of a collapse continue. The same is true for other banks, as I wrote in my KRE and KBW ETFs article here

In the long run, I suspect that the company will lose a substantial number of customers to larger banks like JP Morgan and Bank of America. A recent report showed that these big banks saw over $120 billion in inflows. Also, people have moved to money market funds to take advantage of higher interest rates.

The company, together with other small regional banks, will have to contend with stricter capital requirements and more regulations. All these actions will mean more costs and lower profitability for a while.

Still, I believe that the risk/reward here is encouraging considering that the risks of a bank run have reduced sharply in the past few days. In other words, people and companies who wanted to withdraw their funds have already done that.

Watch here:

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