First Republic Paying A Steep Cost For Growth

Using pullbacks to pick up shares of well-run companies is usually a good strategy over the long term, but it has absolutely not been working with First Republic Bank (NYSE:FRC) here of late. This bank is choosing to prioritize long-term growth over short-term profits, steering into rapidly-rising funding costs to continue acquiring customers and grow the loan book. While I believe this will prove to be a sound decision over the long term, it has hammered the near-term earnings prospects and valuation.

The shares have fallen another 25% since my last update (and over 40% since I flipped from neutral to positive in mid-2021), dramatically underperforming its peer group. I've underestimated just how willing this bank would be to pay the short-term costs for long-term growth, but I do still believe in the longer-term story here. I think the shares remain undervalued, but I could see sentiment and near-term earnings pressure weighing on the stock at least through mid-2023, given where we are in the rate cycle.

 

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First Republic Paying A Steep Cost For Growth