While Bank of America Corp (NYSE:BAC) somehow managed to shake off the mammoth issues which, during the financial turmoil, almost threatened its existence, one of its ex-subsidiaries — First Republic Bank (NYSE:FRC) has shown remarkable resilience with unflagging resolve. First Republic has never reported a loss since its inception and, more importantly, has been outperforming the industry quite perceptibly.
Although the industry is seemingly getting back on the rails on the back of an improving economy, many banks are still struggling to propel revenue growth. So we need to narrow down to stocks that are fundamentally strong enough to make optimal use of the supposedly favorable conditions ahead.
Solid fundamentals
Credit quality: First Republic Bank (NYSE:FRC) has had an impeccable credit history and it is more than likely to continue. During the downturn, when almost the whole industry was blighted and plagued by loan charge-offs, FRC’s management judiciously refrained from reckless lending and managed to keep net charge-offs as low as 0.15% of average loans on an aggregate. Many don’t reach that level even in the best of years. That should be coaxing enough for investors to have faith in management’s ability to ‘pull it off’ in the years to come.
Strong Capital: While most of the banks sweat blood over the revised stringent capital requirements, First Republic Bank (NYSE:FRC) passed with flying colors. After the recession, FRC came up with its IPO with already strong capital ratios. So it gained an upper hand by solidifying its capital position at a time when others were reassessing and repairing the damage.
Take a look at the table below to get a better understanding of how First Republic Bank (NYSE:FRC) fares in terms of credit quality and capital level, when compared with peers and the industry.
| Ratios | FRC | SVB Financial (NASDAQ:SIVB) | City National (NYSE:CYN) | Proposed regulatory requirements |
|---|---|---|---|---|
| Net charge-offs to Average Total loans | 0.00% | 0.20% | 0.13% | N.A |
| Tier 1 capital to RWA* | 13.50% | 11.70% | 9.64% | 8.50% |
| Total capital to RWA | 14.10% | 13.00% | 12.72% | 10.5% |
*RWA=Risk Weighted Assets. Source: Yahoo! Finance (Three months ended March 31, 2013).
The numbers clearly suggest that FRC gets the better of the two. But they also indicate that SVB Financial Group (NASDAQ:SIVB) and City National Corp (NYSE:CYN) are also impressive on an absolute basis as they have extremely low charge-offs and strong capital ratios. Their comparison with FRC wouldn’t be a conclusive one as I have already pointed out that the latter is the best of the pack by miles.
Promising Prospects
Tapping the existing upscale market: The markets in which First Republic operates represent only 21% of the households of the US.
