Thursday, July 18, 2019

First Republic Facing A Tighter Squeeze On Spreads

Private banking-focused First Republic (FRC) remains one of the best bank growth stories in its size bracket, but even high-quality growth stories aren’t immune to cyclical pressures. While First Republic is confident that they can maintain mid-teens loan growth, higher competition for loans is limiting yields while deposit costs continue to rise, and expected rate cuts aren’t likely to help the situation. On top of that, the departure of a significant wealth management team is yet another reminder that companies don’t grow in smooth, uninterpreted arcs very often.

I’m concerned that First Republic management is underestimating the impact of spread pressure in the second half of the year, and I think the company’s model limits their ability to offset these challenges with further expense reductions. Although I think the current valuation is still high relative to the risks of a couple more miss-and-lower quarters, I’d keep this name on a watchlist.

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First Republic Facing A Tighter Squeeze On Spreads

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