First Republic Bank FRC is scheduled to report first-quarter 2023 earnings on Apr 24, before the opening bell.
Following the failure of the Silicon Valley Bank or SVB in March 2023, FRC faced similar concerns over the sustainability of uninsured deposits and unrealized losses in its securities portfolios that could be booked in case of a fire sale.
To combat the crisis, First Republic obtained additional liquidity access from the Federal Reserve Bank and JPMorgan Chase & Co. It fortified the bank’s financial position with more than $70 billion in unused funds for operations, to be used in the event of a deposit flight. Also, it received uninsured deposits aggregating $30 billion from 11 banks of the country showcasing confidence in First Republic.
The company’s first-quarter 2023 revenues and earnings are likely to have declined year over year, reflecting the aforesaid.
In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate on increases in net interest income (NII) and non-interest income. However, higher expenses and elevated provisions for credit losses were the offsetting factors.
First Republic has an impressive earnings surprise history. Its earnings surpassed the consensus estimate in the trailing four quarters, the average beat being 3.71%.
First Republic Bank Price and EPS Surprise
Here are the factors that are likely to have influenced First Republic’s first-quarter performance:
Loan Growth: The lending environment weakened in the first quarter, with the pace of loan growth across most categories slowing down. Per the Fed’s latest data, residential real estate loans, commercial real estate loans and consumer loan growth declined. This is likely to have reduced the overall loan demand in the to-be-reported quarter from fourth-quarter 2022 end.
Also, slow growth in loan as demand cools in the light of higher rates and an uncertain economic environment is expected to have hindered FRC’s lending activity.
Nonetheless, the Zacks Consensus Estimate for average interest-earning assets is pegged at $201.8 billion, suggesting a 2.5% increase from the prior quarter’s reported figure.
NII: Federal Reserve hiked rates by 50 basis points in the to-be-reported quarter and 25 bps in the prior quarter. The policy rate reached 4.75-5%, the highest since 2008. Such successive rate hikes have limited any further positive impact on the company’s NII and asset yields.
Also, yield curve inversion and rising funding costs in the March quarter are likely to have hindered the bank’s net interest margin.
The consensus mark for NII is pegged at $990 million, suggesting a 15.7% fall on a sequential basis. We project NII to be $1.1 billion.
Non-Interest Income: The bank has a robust wealth management practice, with a focus on personalized customer service experience through its relationship banking model. It has also been expanding its investment management service offering to clients. These efforts are expected to have aided the company in onboarding customers.
However, given the concerns faced by FRC post closure of SVB and worsening economic backdrop, the company is likely to have lost its customer base during the quarter.
Uncertainty due to recession fears has dampened the market performance. Weaker equity markets and low deal-making activity during the quarter are expected to have affected FRC’s wealth management revenues and assets. Nonetheless, the consensus estimate for investment management fees is pegged at $153 million, implying a rise of 8.5% sequentially.
Also, the consensus estimate for brokerage and investment fees of $29.11 million indicates a marginal increase from the previous quarter’s reported number.
Higher transaction volume from clients is expected to have improved foreign exchange fee income. The consensus estimate is pegged at $25.33 million, indicating a 1.32% increase from the previous quarter’s reported number.
With this, total non-interest income is expected to see a marginal sequential rise to $265 million. Our estimate is pegged at $248.9 million.
Expenses: First Republic’s investments in franchise development, regulatory infrastructure and digital initiatives, including additional hiring, are anticipated to have kept costs elevated in the quarter, thereby curbing the bottom-line expansion. We project expenses to be $977.1 million.
Asset Quality: The Federal Reserve’s accelerated pace of interest rate hikes, continued inversion of the yield curve and uncertainty in the banking space subsequent to the collapse of SVB have increased concerns regarding a downturn in the broader economy and loan losses. Hence, higher reserve built during the quarter is expected to have weighed on FRC’s bottom-line growth.
What Our Quantitative Model Predicts
Our proven model does not conclusively predict an earnings beat for First Republic this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat, which is not the case here.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP: Earnings ESP for First Republic is -6.77%.
Zacks Rank: First Republic currently carries a Zacks Rank #4 (Sell).
The Zacks Consensus Estimate for first-quarter earnings has been revised 23.4% down over the past month to 72 cents per share. Moreover, it suggests a fall of 64% from the year-ago reported figure.
The consensus estimate for revenues of $1.13 billion indicates a decline of 18.9% from the year-ago reported figure.
Stocks That Warrant a Look
Independent Bank IBCP and QCR Holdings QCRH are a few stocks that you might want to consider, as these have the right combination of elements to post an earnings beat in their upcoming releases, per our model.
Independent Bank has an Earnings ESP of +1.40% and carries a Zacks Rank #3 at present. IBCP is slated to report first-quarter 2023 results on Apr 27. You can see the complete list of today’s Zacks #1 Rank stocks here.
QCR Holdings has an Earnings ESP of +4.62% and currently carries a Zacks Rank #3. QCRH is scheduled to release first-quarter 2023 results on Apr 26.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.