Relaunching Coverage of First Republic With a $41 Fair Value Estimate

We are relaunching coverage of First Republic FRC. We emphasize that there is a high degree of uncertainty about the future value of First Republic and have increased our Morningstar Uncertainty Rating for the bank to Very High.

The bank could largely maintain its deposit base and eventually recover to previous profitability expectations (fair value estimate of $120), it could only partially maintain the deposit base and suffer more permanent declines to profitability but still remain a viable franchise (fair value estimate of $88), it could see a material and permanent impairment in the profitability and brand of the franchise (fair value estimate of $23), or it could lose enough of its deposit base that under the right circumstances, it could be worth $0 for current equityholders.

‘Rescue’ Effort May Buy First Republic Time

We attempt to model out these different scenarios and give investors a sense of what needs to happen for the bank to reach different valuations. Investors can apply any probability weighting they wish to these scenarios and come up with their own fair value estimate. Based on recent reports that the bank is considering a sale, we imagine there must indeed be some stress on deposits behind the scenes, although the larger banks’ “rescue” of First Republic could give the bank time to stabilize the situation and eventually return to growth, although even that is highly uncertain.

We weight the bullish case at 5%, the base case at 30%, permanent impairment at 35%, and $0 at 30%, leading to a fair value of $41. We do not factor in a “takeover at $X price” scenario, but that could be another outcome to consider, although again highly uncertain with the potential for mark-to-market losses on the bank’s current loan book based on fourth-quarter disclosures.