The third-quarter results of First Citizens Bank (ticker: FCNCA) have garnered much excitement among investors. The bank’s successful integration of the failed Silicon Valley Bank into its business has proven to be prosperous.
J.P. Morgan Securities, who had already given First Citizens’ shares an Overweight rating, now holds an even more bullish view on the stock. They project that the shares will reach $2,000, a substantial increase from the previous price target of $1,850. If their prediction holds true, this would represent a 43% gain for the stock, which is currently trading near $1,400.
The key reason behind this optimistic outlook is the belief that First Citizens is just beginning to experience the advantages of its acquisition of Silicon Valley Bank from the Federal Deposit Insurance Corp in March. Known for their conservative lending decisions, First Citizens provides stability, while Silicon Valley Bank, renowned as the bank of the innovation economy, is poised for significant growth when the climate for venture-capital investment improves.
Analyst Steven Alexopoulos from J.P. Morgan expressed his optimism about this combination: “As we evaluate the combination of the First Citizens management team being one that thinks and acts for the long term with the opportunity for SVB to regain its former self, we are optimistic that the best days for the SVB franchise could be ahead.”
Alexopoulos raised his earnings projections for First Citizens as well. He now expects the bank to earn $178.04 per share in 2023, up from his previous target of $168.73. Additionally, he increased his forecast for 2024 earnings by $7.39 to $195.33 per share.
According to Alexopoulos, First Citizens’ stock currently trades slightly below 2024 estimates for tangible book value, indicating that it is undervalued compared to its peers. This suggests there is potential for the stock price to rise further.
However, it is important to consider the risks involved. First Citizens’ shares have already risen by 84% this year, which suggests that the positive news from the Silicon Valley Bank purchase may already be priced into the market.
The Innovation Economy Faces Challenges
The innovation economy has faced significant challenges in recent years due to economic uncertainty and international turmoil. According to Alexopoulos, there is currently more than $300 billion of venture capital “dry powder” in the U.S., but cautiousness among venture capitalists has limited its deployment. The success of First Citizens’ partnership with SVB hinges on a rebound in activity.
Retention and Recovery at SVB
Another challenge for SVB is retaining and winning back clients, following a significant decline in deposits earlier this year. While deposits have stabilized at around $40 billion over the last two quarters, First Citizens anticipates a $5 billion decline in total deposits in the fourth quarter. Many of SVB’s customers are fledgling companies that are depleting their cash reserves, while VC funding remains subdued.
Potential for Improvement
Alexopoulos believes that his estimate may be conservative, as there is potential for a turnaround in VC funding and First Citizens’ efforts to regain business. SVB has been actively promoting its resurgence through advertising campaigns, participation in conferences, and the national launch of its “Yes, SVB” campaign. These efforts have already resulted in over 600 new clients for the bank in the third quarter.
Assessing the Risks and Opportunities
While there are risks associated with the First Citizens-SVB partnership, there are also plenty of opportunities to capitalize on. The bank will need to navigate the challenges posed by the innovation economy, but with careful planning and strategic initiatives, they could potentially thrive.