But that is almost 55% of all high net worth households. So instead of exploring new markets, management is focused on penetrating deeper into existing core markets such as New York City, Boston, Silicon Valley and Boston. The US housing market has been showing encouraging signs of recovery and these affluent markets look perfectly leveraged. First Republic Bank (NYSE:FRC) looks well positioned to make good use of its resources.
A spurt in deposits in on the cards: As demand for loan grows, FRC looks all geared up to witness a strong and sustainable deposit growth in the not-so-distant-future. More importantly, while business loans account for only 9% of loan portfolio, business deposits already account for 41% of its deposits. As business banking gets stronger, both loans and deposits should grow. The importance of these business bank’s deposits cannot be overlooked while ascertaining the outlook of a bank as they are a source of low cost funds to grow the balance sheet.
The stumbling block
Net interest margin (NIM) compression – At the moment, however, deposit growth continues to lag loan originations. To cover the funding gap, the bank may have to sell off its loan production. Perhaps, management has had been a little too aggressive in cutting deposit rates. To rectify it and boost deposit growth, First Republic Bank (NYSE:FRC) is now raising rates. But when the rates increase, the bank’s funding costs will increase before its earning assets mature. This will further constrict the margin between earning asset yield and funding costs.
Continued pressure on asset yields and higher funding costs will, therefore, result in more pressure on NIM. This, I think, is the biggest issue the bank will have to address. To deal with this, it’s selling fixed-rate loans and growing its core deposits together. This will bridge the gap between its assets and liabilities.
And the bottom line
Make no mistake about it, NIM pressure is not exclusively associated to First Republic but to the industry in general. And with such sound fundamentals, FRC definitely looks better equipped to overcome these hurdles and exploit all the opportunities that come its way. From an immaculate history to promising prospects, everything about FRC makes me bullish about it. What’s your take, Fools?
Zeeshan Siddique has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America. Zeeshan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article This Is What Legends are Made Of originally appeared on Fool.com is written by Zeeshan Siddique.
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