Ask any bank management team, and they will likely tell you that their bank has great customer service, which is part of their competitive advantage. But oftentimes, it doesn't really seem to translate to a bank's financial returns for investors.
At First Republic Bank (FRCB), customer service is really the differentiator that drives the bank's entire business model and has been one of the main contributors to the bank's success. First Republic has a high-touch, relationship-based approach that attracts a premium high-net-worth customer base in the major coastal regions.
Even more, the bank has hard data showing just how successful its customer service has been over the years. Let me explain.
First Republic has a superb net promoter score
Customer service is one of those things that's difficult to measure because what may seem like a strong relationship in the present could disappear a year later. But banks and other companies do the best they can to quantitatively measure how good their customer service is.
One way they do this is through a metric called the net promoter score (NPS), which essentially measures how likely customers are to recommend a product or service from a company to a friend or close associate. The higher the NPS, the better. In 2022, First Republic achieved a record NPS of 80. For those that use First Republic as their "lead bank," the NPS was 87.
The average NPS in the banking sector is 31. Other popular companies such as Amazon, Nordstrom, Apple, and the Ritz Carlton Hotel all have an NPS score between 55 and 70, so First Republic is really in a league of its own. This translated into customer loyalty and it has been very good for the company.
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In 2022, more than half of the bank's new deposits came from existing customers, while 64% of new loan originations came from existing clients. The majority of the remaining growth came from client referrals, while only a small portion came from completely new customers. Not having to constantly market to new customers lowers customer acquisition costs for First Republic and increases the lifetime value of its customers.
Additionally, when a lot of a bank's loan growth is coming from existing customers, it is easier to underwrite loans because the bank has already done business with the customer and has a good understanding of their financial health and ability to pay off loans.
This explains why First Republic maintained extraordinarily healthy credit quality since it launched in 2010. The net loan loss rate for the bank has been zero for the last three years. Even during the Great Recession, the bank widely outperformed the top 50 U.S. banks as a group on loan losses.
Customer service has led to a premium valuation
First Republic's client-centric approach led to a very strong customer base that continually wants to do more business with the bank and served as an efficient marketing tool to attract new high-net-worth customers.
Since 2010, First Republic's stock is up more than 418%, and the bank trades at just under 200% of its tangible book value, or net worth, and more than 23 times forward earnings.
The bank may struggle a bit in 2023 due to rising deposit costs that will likely cut into its margin, but long term, I expect this bank to continue to use its superior customer service to outperform the industry.
