The government’s response to maintain stability in the banking system creates stock winners from First Republic failure.
First Republic Bank is the second largest bank with assets over $200 billion to fail, This follows the failure of Silicon Valley Bank, Credit Suisse, and Signature Bank. Fearful customers withdrew deposits in droves. When the company revealed over $100 billion in withdrawals, it sealed First Republic’s fate.
To protect depositors, the Federal Deposit Insurance Corporation (“FDIC”) arranged for JPMorgan (NYSE:JPM) to take First Republic over. It will undoubtedly benefit from the deal. The loss-share transaction will see the FDIC’s deposit insurance fund lose $13 billion. Because of the deal, the FDIC expects minimized disruptions for loan customers.
JPM stock may gain from taking over First Republic, yet investors have seven other bank stocks that may fare better. The former may face closer government scrutiny as it manages First Republic’s assets. This would hamper its performance. Investors should instead look at bank stocks that benefit from First Republic’s failure.
They offer more rewards over risks, especially when markets express excessive fears for the banking sector.
Goldman Sachs (GS)
The firm’s ability to attract assets suggests that it is among the best stocks to buy after First Republic’s failure.
Goldman is undergoing a reset. It is working through deals that will add meaningfully to business growth. Look for aggressive mergers and acquisitions in the back half of this year. As bank valuations fall, Goldman Sachs may add companies that fit to its strategy. This includes its strategy of strengthening its leading global banking and markets franchise.
The company is reducing its balance sheet density by $2.3 billion. It also includes reducing its principal investment portfolio to less than $15 billion by the end of 2024. That way, Goldman Sachs will have less exposure to the risk of falling asset values. Expect market headwinds to delay these deals. This will not hurt the firm’s commitment to grow its management fees.
M&T Bank (MTB)
M&T Bank (NYSE:MTB) is indirectly one of the stock winners from the First Republic failure. In the last quarter, Darren J. King, Chief Financial Officer, said that the company has a strong, diversified community bank model. It managed the business prudently. As a result, M&T Bank posted Q1 net income nearly doubling from last year.
Investors need not worry about deposit losses. CFO Kig said that deposits did not change despite disruption in the overall market. In addition, commercial and wealth deposits both remain high.
In the consumer space, depositors holding substitutes to take advantage of the rising rates. M&T saw an increase in demand for money market savings and savings accounts.
Skeptical investors thought that weaker deposit flows would gain momentum. Fortunately, the weaker demand balances are partly because of a seasonal pattern. Commercial customers need funds to pay taxes. In addition, they need to reduce their balance to align with their economic activities.
PNC Financial (PNC)
While PNC reported average deposits increased to $436.2 billion, up by 0.3%, markets worried about its outlook. The firm expects revenue between $21.96 billion and $22.18 billion. Revenue will grow by 4% to 5%, instead of an earlier forecast of 6^ to 8% Y/Y growth.
Fearful depositors are decreasing their balance amounts. PNC is bucking this negative trend. The community bank expected that customers who accumulated stimulus money during Covid would draw that down. Looking ahead, PNC expects the Federal Reserve will keep rates higher for longer. It expects volatility in net interest income.
Once the Fed indicates it will stop raising rates, PNC will revise its NII targets to the upside. Investors will buy PNC stock on the increased certainty.
Toronto-Dominion Bank (TD)
TD will make a $200 million cash payment to First Horizon. This adds to the $25 million fee reimbursement that was due from the merger agreement.
TD is saving billions from the terminated deal. The Canadian bank will have more cash on hand, increasing its Common Equity Tier 1 (CET1) ratio. Investors will have higher confidence that the bank will absorb a financial shock. Expect investors to accumulate TD Bank stock, even though the stock gained from First Republic’s failure.
TD may shop for other U.S. regional banks at a steep discount. The FDIC created a precedent of hurting the common and preferred stock prices of struggling banks. If it pauses its merger and acquisition strategy, TD may buy back shares instead.
Truist Financial (TFC)
Truist Financial (NYSE:TFC) recently reported strong revenue growth and profits. As shares fall, TFC is among the stock winners from First Republic’s failure.
Truist investors may buy the growing regional bank at a discount. The firm reported revenue growing by 15.0% Y/Y to $6.15 billion. In addition, the stock priced in the allowance for loan and lease losses is worth $4.5 billion.
Customers cycled their money into money market accounts to capture the higher interest rate returns. Conversely, Truist’s wealth clients deployed their assets into investment accounts. The overall lack of business change is good news. Truist customers remain loyal amid First Republic’s closure.
The firm expects demand deposit accounts to fall to the high-20s. This is due to normalization from Covid when stimulus checks increased customer cash levels.
The company strengthened its balance sheet by selling 20% of its $14.75 billion stake in Stone Point Capital. This enables TFC to pursue more insurance deals to fuel its organic growth.
Wells Fargo (WFC)
Wells Fargo (NYSE:WFC) might attract an influx in deposits as customers transfer funds out of regional banks.
In Q1, Wells Fargo posted strong revenue growth. It continued to make progress in its efficiency initiatives. More importantly, the increase in delinquency and net charge-offs slowed. The bank is actively monitoring remote risk. This includes pockets of risk from commercial office real estate.
The increase in net earnings, from $0.91 to $1.23 a share Y/Y suggests that Wells Fargo may increase its dividend. Patient investors will need to wait for banks to conservatively increase their cash on hand first. Once customer confidence increases for regional banks, big banks like Wells Fargo will reward its shareholders.
Wells Fargo is de-risking its loan portfolio, especially its office portfolio. It decreased its commitment by 5% Y/Y. To minimize delinquencies, the bank is working proactively with borrowers to manage its exposure. The structural enhancements and pay-down will lower the chances of customer debt defaults.
Zions Bancorp (ZION)
Zions Bancorp (NASDAQ:ZION) is headquartered in Utah. The bank is among the best stocks to buy after First Republic’s failure. NII and Net interest margin (“NIM”) both rose by 2.6% and by 25%, respectively.
CEO Harris Simmons said that higher interest rates set a positive trajectory for deposits. In the next quarter, expect loan growth and improved deposit flow as the banking sector puts First Republic’s closure behind it.
Zions will grow its balance sheet amid the countervailing trends. Customers will recognize the safety of Zions. This will encourage them to open deposit accounts with a larger balance. Commercial depositors who want to have accounts in multiple banks should pick Zions Bancorp. In addition, Zions actively manages its relations with large customers. They too, will increase their balance.
Similar to the aforementioned banks, Zions will need to manage its office property loan portfolio. When it reduces risks, it will book some credit losses, decreasing uncertainties for investors.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.