'Storm Is Brewing' for Banks

First Republic Bank
Shares of First Republic Bank (FRC) of San Francisco closed at $32.99 Monday, returning 8% year-to-date, following a 5% return during 2011. FRC data by YCharts

The shares trade for 1.7 times their reported March 31 tangible book value of $18.91, and for 11 times the consensus 2013 EPS estimate of $2.89. The consensus 2012 EPS estimate is $2.72.

The bank is expected to report its second-quarter results on July 18, with analysts estimating a 65-cent profit, declining from 67 cents in the first quarter, but increasing from 64 cents during the second quarter of 2011.

First Republic was acquired by Bank of America (BAC) as part of the purchase of Merrill Lynch in January 2009, and then sold in July 2010 to an investor group that included Colony Financial (CLNY) and General Atlantic LLC and was led by First Republic's original management team.

The bank then completed a public offering in December of 2010.

Alexopoulos rates First Republic "Overweight," with a $41 price target, and said on Tuesday that "with management still calling the pipeline its best ever amid good activity levels within the geographic footprint, we look for loan growth to remain strong at 18% annualized, moderating from a very strong 25% pace of growth in 1Q." The analyst expects First Republic's net interest margin to narrow by six basis points from a relatively strong 4.39% in the first quarter.

First Republic's first quarter net interest margin declined from 4.53% in the fourth quarter and 4.76% in the first quarter of 2011.

With the bank expanding its wealth management business through new office openings in Boston and now in Delaware, JPMorgan looks "for fee income to increase 4% linked-quarter on the back of wealth management fees."

The company plans to begin paying a quarterly dividend of 10 cents, beginning in the third quarter.

Alexopoulos estimates First Republic will earn $2.06 a share for all of 2012, followed by 203 EPS of $2.26.

The analyst said that First Republic "could be the strongest generator of intrinsic value in our group" of covered mid-cap regional banks, and that the bank differentiates itself from most of the competition by targeting "exclusively either high net worth or those on the path to becoming high net worth," while delivering "service levels that are among the highest in the industry today."

Alexopoulos illustrated his point on customer service by saying that "while many banks struggle to get to 2-3 products sold per retail customer, FRC is currently averaging 9 products per customer."

Interested in more on First Republic Bank? See TheStreet Ratings' report card for this stock.

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