The past 12 months have been a banner time for regional banks and their shareholders. The SPDR S&P 500 Regional Banking ETF has roughly doubled -- more than doubling the comparable return of the S&P 500 index. First Republic Bank (FRCB) is one of the largest holdings in that ETF, and its share price has performed roughly in line with it, but the real story with this institution is how its operations have grown over the last decade.
First Republic has a lending portfolio across housing, commercial real estate, and business -- but it also boasts a significant wealth-management division with over $218 billion in client assets. These segments have grown markedly since 2010, in some cases by over 10 times, and its recently delivered first-quarter earnings results suggest the company has no intention of slowing down.
Image source: Getty Images.
The breakdown
First Republic Bank operates in major U.S. markets including California, New York, and Florida, as well as some secondary markets. That large footprint contrasts with smaller regional banks, which frequently focus on just one or two geographical areas. No doubt, that wider reach was a key contributing factor that helped it grow its wealth-management business.
That said, wealth management only accounts for about 13% of the bank's total revenue. In 2020, First Republic took in $3.26 billion in net interest income from all loan segments, plus investments; and $654 million in non-interest income from its wealth management segment and general consumer banking fees.
Residential real estate makes up roughly 70% of the bank's loan portfolio, while business-related loans account for about 13%. Several smaller pieces make up the rest, with commercial real estate being the largest of them. Broadly speaking, the bank has a well-diversified business mix.
Accelerating metrics
At Wednesday morning's prices, the bank is valued at almost 29 times trailing-12-month earnings, which is high for a bank. However, after generating revenue of $3.9 billion in 2020, it's not only growing but accelerating its growth, suggesting investors might be pricing in some anticipated growth in future years.
|
Year |
Revenue |
Growth |
|---|---|---|
|
2018 |
$3.05 billion |
17.3% |
|
2019 |
$3.34 billion |
9.5% |
|
2020 |
$3.92 billion |
17.4% |
DATA SOURCE: COMPANY FILINGS
In 2021's first quarter, revenue grew at an even faster rate of 23.8% year over year to $1.1 billion. There is little doubt some of this growth has been propelled by the economic stimulus measures the federal government has been using to support the economy through the pandemic, but First Republic has been doing its part to ensure that those rising revenues flow through to its bottom line. So while external tailwinds may be helping, the bank's strong earnings performance is also a credit to its operational acumen.
|
Year |
Earnings Per Share |
Growth |
|---|---|---|
|
2018 |
$4.81 |
11.6% |
|
2019 |
$5.20 |
8.1% |
|
2020 |
$5.81 |
11.7% |
|
Q1 2021 |
$1.79 |
49.2% (year over year) |
DATA SOURCE: COMPANY FILINGS
Besides, the First Republic growth story extends beyond just the last year, as it often celebrates its success over the last decade (since it was divested from Bank of America). For good reason -- its expansion has been incredibly impressive. Since 2010:
- Total loans are up by 640% to $118.1 billion
- Total customer deposits are up by 670% to $127.9 billion
- Wealth management client assets are up by 1,300% to $218.9 billion
Placing these figures in the context of the company's more recent results, it's understandable why investors would expect to see this bank keep on growing.
Looking forward
Given the current steep earnings multiple, there's quite a bit of pressure on the bank to deliver outstanding 2021 results. Its stock also trades at 3 times tangible book value, which is at the high end of its 10-year average. It could bring this down simply by growing earnings to boost its book value, but at this level there is some added risk. If there's a slowdown in revenue or earnings growth, investors who have priced in a huge year could sell off the stock.
First Republic's first-quarter results may provide some confidence to those investors. For 2021, analysts' consensus earnings estimate for the bank is $7.10 per share. If they are right, the stock could remain buoyed, as that would amount to a further acceleration in growth. But it's also worth noting that the stock currently trades at more than 26 times that estimate.
In the banking world, that multiple might still be considered a little rich, but considering First Republic's performance over the past decade, there are reasons to expect that long-term investors who buy into the stock now may be handsomely rewarded.
