When one company buys another, particularly a troubled one, the acquiring business typically sees its share price fall. But when
First Citizens BancShares
bought Silicon Valley Bank out of government receivership, its stock soared by more than 50%.
Six months after the acquisition, Wall Street is no less upbeat about First Citizens’ prospects. Analysts at
J.P. Morgan
recently initiated coverage on the Raleigh, N.C.-based lender with an Overweight rating and a target of $1,850 for the price, which implies a gain of 34% from recent trading levels.
“As we evaluate the potential of combining the acquired
SVB
franchise with First Citizens, we are optimistic that, although challenges remain, the best days for the SVB franchise might be ahead, and the opportunity for First Citizens shareholders appears to be more powerful with SVB now under the strong leadership of First Citizens,” Steven Alexopoulos, an analyst at J.P. Morgan, wrote last week.
All but one of the eight analysts covering the stock rate the shares the equivalent of a Buy, according to FactSet data. And even the analyst with the lone Hold rating sees it climbing to $1,675, which is still plenty of runway for a stock that recently changed hands at $1,384.
The optimism about First Citizens results in part from the lender’s long history of bank acquisitions. Since 1990, it has acquired roughly 50 banks, almost half of them from the Federal Deposit Insurance Corp. The fact that First Citizens has been able to grow for decades by buying banks from the FDIC shows that it knows how to fold troubled operations into its business.
Also underpinning the optimism is Wall Street’s view that First Citizens bought the parts of SVB that worked, rather than those that led to its collapse.
“We believe that the underlying business at Silicon Valley Bank was among the most valuable in the U.S. with the company being the bank of the innovation economy,” Alexopoulos wrote. In his summation, SVB failed largely because it invested a surge of deposits it got in 2021 and 2022 into long-dated securities that plunged in value as the Federal Reserve began raising interest rates.
To be sure, SVB wasn’t the only bank that suffered from the phenomenon. As of the end of the second quarter, U.S. banks were sitting on just over $550 billion in unrealized losses in their securities portfolios, according to a recent FDIC report. SVB’s problem was exacerbated as its customers yanked deposits, forcing the bank to sell the long-dated debt to raise cash to repay them, crystallizing those losses.
As of the close of the second quarter, what was SVB accounted for 44% of First Citizens’ loans and 29% of its deposits. The deal also makes First Citizens the heir to SVB’s dominant role as the banker to the start-up and venture capital community, in which it often connected fledgling businesses to VC firms.
While Alexopoulos wrote that venture-capital investing is expected to total $30 billion in the third quarter, compared with $40 billion to $50 billion in each of the prior four quarters, Wall Street is expecting it will eventually recover. When it does, First Citizens stands to benefit from its strong foothold in the start-up world.
“With the role that SVB played in the innovation economy allowing start-up founders to run their businesses and aim to own their product category, in our view many of these aforementioned aspects will likely migrate over and stay intact under First Citizens,” Alexopoulos wrote.
Looking ahead to 2024 and 2025, Alexopoulos sees First Citizens outperforming other banks J.P. Morgan covers by a wide margin. Revenue growth is expected to be 7.3% and 5.3% in 2024 and 2025, respectively, while other banks are forecast to see growth of 0.4% and 3.8% in the next two years. Earnings at First Citizens are projected to grow by 1.2% in 2024 and 9% in 2025, topping the respective peer averages of 0.9% and 6.3%.
Write to Carleton English at [email protected]
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