First Republic's stock could be stuck at $25 even if deposits start to return, Morgan Stanley says
First Republic 's stock is unlikely to see a significant rebound after the regional bank suffered major outflows of deposits, according to Morgan Stanley. Shares of the San Francisco-based lender were under pressure again Monday , with the stock falling below $20 per share in early trading. The stock was trading near $115 per share before troubles emerged at the now failed Silicon Valley Bank, sparking a sell-off in regional bank stocks. FRC 1M mountain First Republic's stock has fallen sharply since the start of the regional banking crisis. Morgan Stanley analyst Manan Gosalia said in a note to clients that First Republic's stock was likely to trade around its current range for at least a few months as investors wait for the bank to find its footing after massive deposit outflows. "Our base case range incorporates two scenarios: 1) Half of deposits lost come back by 2Q23 and FRC is able to slowly wind down and right-size its balance sheet. In this scenario, we get to a 2024 EPS of $3.11, applying an 8x multiple gets us to a price of $25. 2) Half of estimated remaining uninsured deposits leave by 2Q23, leading to a slower path to profitability. In this scenario, our 2025 EPS is $1.52, and using an 8x multiple and discounting by one year at a discount rate of 10%, results in a price of $11," the note said. The collapse of Silicon Valley Bank appeared to spur depositors with more than the insured maximum of $250,000 to pull money out of regional banks. Based on borrowing from the Federal Reserve that First Republic disclosed last week, deposit outflows at First Republic may have been roughly $86 billion, Morgan Stanley estimated. The outlook for First Republic is still highly uncertain, Gosalia said, and Morgan Stanley has an underweight rating and no formal price target for the stock. "Given the major changes in the balance sheet and the reliance on expense cuts to get to profitability, this base case range comes with a low level of confidence," the note said. One solution to First Republic's struggles could be a bigger bank stepping in to buy the regional lender. However, Wolfe Research analyst Bill Carache said in a note to clients Sunday that the bank's portfolio of bonds and loans would "effectively wipe out" First Republic's tangible common equity if it was marked to market. The bank's focus on customer service above efficiency could also make it hard to find a match with a new parent bank, Carache said. — CNBC's Michael Bloom contributed to this report.