First Citizens BancShares: One Of The Banks To Own In A Potential Trump Presidency

seekingalpha10-29

The financial sector is expected to benefit significantly from the loosening of bank regulation under Trump.First Citizens BancShares is an asset-sensitive bank and thrives in a high interest ...

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J. Michael Jones/iStock Editorial via Getty Images  First Citizens BancShares (NASDAQ:FCNCA) remains a good pick to consider in a potential Donald Trump presidency, as it would benefit both from both easing bank regulation and a higher interest rate environment that would be the likely outcome of Trump’s economic policies. Obviously, public policy remains remarkably difficult to forecast as politicians never do everything they promise and there is also the added risk of election unpredictability. That said, Trump is generally considered to be the deregulation candidate who will make it easier for financial companies and real estate developers to do business, as mentioned in Seeking Alpha’s article Trump Vs. Harris: 7 Election Stocks To Position Your Portfolio For Q4. In addition, his trifecta of policy pledges to scale down immigration, introduce tariffs and implement and extend tax cuts are all going to be inflationary, which will most likely force the Fed to keep interest rates higher for longer. Meanwhile, FCNCA is one of the most asset-sensitive regional banks due to a combination of a high share of variable-rate loans and fixed-rate liabilities, such as the USD 35bn 5-year 3.5% Purchase Money Note borrowed from the FDIC as part of the SVB acquisition. FCNCA’s very high asset sensitivity is also demonstrated by its own Net Interest Income sensitivity analysis, which estimated that NII will decline by 13.8% in response to a 200bps Fed funds rate cut, according to the second quarter 10-Q filing. In comparison, most other major regional banks estimate the NII sensitivity to be lower than 5% in a scenario of a 200bps rate cut, while some banks even expect NII to increase such as U.S. Bancorp (USB) and Comerica (CMA), as I have highlighted in two of my previous pieces. FCNCA 10-Q filing  What changed since my last coverage of FCNCA My last coverage of FCNCA was on May 29, 2024, before the stock rally from late July when the company announced its $3.5bn share repurchase plan and the subsequent decline in late October due to its disappointing Q3 results. In my previous analysis, I forecasted that “a run towards $2,000, or 12.5% upside compared to current levels, is definitely possible if the company announces a buyback.” This is more or less what happened as the stock peaked at around $2,080 per share in mid-October. The stock has fallen by around 9% since the peak as its Q3 earnings changed expectations for growth and profitability going forward. It should be noted that the stock had a Seeking Alpha Quant rating of around 4.70 before the latest Q3 earnings report, which fell to 3.05 after the release. The Q3 earnings report showed falling loan balances and contracting net interest margin, while the bank also reduced its guidance for Q4 and full year 2024. For instance, total loan balances fell by 0.5% q/q in Q3 driven by $2.1bn decline in SVB Commercial loans, but this was partially offset by growth in other segments. In addition, the net interest margin fell by 11bps q/q to 3.53% which mainly came from decline in accretion income related to the loan discount accumulated from the SVB acquisition. Despite the fall in the net interest margin, the current level is one of the highest among regional banks due to the aforementioned high NII sensitivity to interest rates. FCNCA earnings presentation Q3 There were also several positive developments, such as the increase in the adjusted CET1 ratio (excluding the impact of the FDIC shared loss agreement) by 3bps q/q to 12.51% at end-Q3 despite the fact that the bank bought back some $700mn of shares in Q3. The adjusted CET1 ratio is especially important to follow as a reading above the 10.5%-11.0% level would enable the bank to do another buyback in H2 2025. In addition, tangible book value per common share increased further by 4.2% q/q to USD 1,502.75 in Q3, which means that the stock now trades at a very attractive 1.28 Price to Tangible Book Value. How a Trump Presidency is going to impact regional banks, FCNCA The central point of my investment thesis is that a potential Trump presidency would be a significant upside risk for the stock, partially because of the expectation that Trump would bring about bank deregulation. To remind, Trump rolled back in 2018 a large deal of the Dodd-Frank bank regulations put in place after the 2008 financial crisis, particularly for banks with less than $250bn in assets. That said, his deregulation might have contributed to the regional banking crisis from early 2023, which highlighted some lapses in regulation. In his second term, Trump is likely to be much more lenient on banks, particularly with regard to the so-called Basel III Endgame, compared to his opponent in the 2024 election, Kamala Harris, as suggested in this Bloomberg Intelligence analysis. Separately, I believe that a Trump presidency carries a higher risk of inflation as his policies on tightening immigration rules, introducing tariffs and stimulating the economy through tax cuts could be expected to reignite inflation. According to a recent analysis from the Peterson Institute for International Economics, Trump’s policies would lead to an increase in CPI by 4.1pps to 7.4pps by 2026 than otherwise. That said, I also assume that a Trump presidency would not be self-destructive on the economy and would not erode Fed independence, as it is also suggested in the analysis. In my view, Trump often hyperbolizes what he is going to do, so a 60% tariff on imports from China is not going to happen, but still, it shows the general direction he is looking to take. In addition, Trump could also stabilize the federal budget deficit through spending cuts and one of his strongest supporters, Elon Musk, has recently called for $2tn spending rationalization, which would be deflationary in itself. In addition, Trump has called for significant expansion of oil and gas production to bring down fuel prices, which could offset the inflationary impact of his other pledges. Overall, my expectation is that a Trump presidency would be somewhat inflationary compared to a Harris presidency, but not by a great deal. As a result, the Fed will be forced to keep rates higher for longer, which naturally favours banks, and in particular banks with higher asset sensitivity such as FCNCA. The connection between higher tariffs and higher U.S. interest rates was also highlighted in this CNBC article, which cited the head of the Institute of International Finance. FCNCA can still prosper during lower rates if IPO activity bounces back Even if the current path of disinflation continues and interest rates continue to fall, FCNCA can still find a way to prosper, especially if venture capital investment bounces back. According to this PwC report, IPO activity will improve in 2025 as uncertainty regarding the US presidential election will be removed, while rate cuts continue to support the attractiveness of equities versus bonds. In that vein, FCNCA’s CFO Craig Nix commented in the latest earnings call that “an improved appetite for IPOs remains elusive, and we expect continued stress in this portfolio in the near term but remain optimistic that a declining rate environment will help generate more activity in the space.” The recovery in IPO activity would be a source of cheap deposits for FCNCA which inherited SVB’s strong positions in the tech startup industry. What is more, FCNCA has mostly defended SVB’s good standing with tech entrepreneurs in the year after SVB’s acquisition as SVB Commercial deposits have stabilized. Nonetheless, FCNCA is certainly expected to face increased competition from other banks in the tech startup industry as many of its clients have diversified and opened accounts with other banks. Thus, FCNCA is unlikely to dominate the industry in the same way that SVB did. Overall, I think that lower interest rates will depress earnings in the short term, but this would be partially offset in the long term due to the recovery of startup activity. Still, the latest earnings release from Oct 24 showed that investors are unwilling to wait and have punished FCNCA for its lacklustre performance in a falling interest rate environment. Recent price correction gives a good entry point FCNCA now trades at 10.06 forward earnings as its stock fell by 9% on Thursday (Oct 24) due to the lacklustre Q3 results. This compares to 12.23 forward P/E for U.S. Bancorp (USB), 15.57 for KeyCorp (KEY) and 13.04 for Fifth Third Bancorp. In addition, the bank is particularly attractive in terms of the price to tangible book value metric which stands at 1.28 and is one of the lowest among its peers. Thus, FCNCA can definitely be considered a value play, especially after the recent price correction. Meanwhile, FCNCA still has $2.5bn shares to buy back as of Oct 22 as part of its share repurchase plan. In my view, the buying FCNCA can be expected to put a floor on the bank’s price in the near term. On the negative side, FCNCA maintains a very low dividend yield of 0.41% due to its reliance on share repurchases as a way to return cash to shareholders. Thus, the upside momentum for the stock will mostly depend on any additional share repurchase plans that the bank may announce in 2025.   FCNCA Q3 earnings presentation Conclusion FCNCA is definitely unique among regional banks due to its very high NII sensitivity to interest rates, its exposure to the tech startup sector, and its very large share buyback plans. I am arguing that a potential Trump presidency would benefit regional banks as a whole due to laxer bank regulations, but at the same time, FCNCA may be the biggest winner if interest rates are kept higher for longer. In my view, investors that buy FCNCA now will gain some upside exposure to a potential Trump presidency, while at the same time, they will buy a bank that remains undervalued to peers. That said, I don’t think that the stock will perform very well in a falling interest rate environment until the bank sees a significant pick-up in SVB deposits, which makes it a long-term value play.  Last but not least, I should point out that I am writing this article on Oct 28 when Trump is considered to be the betting favourite to win the election, but the election is still expected to be very close. Overall, my recommendation is a buy rating in the current environment, but I would change the rating to a strong buy if Trump wins the election, and he delivers at least partially on his policy pledges. Downside risks for the stock relate to the potential hard landing of the US economy, lower interest rates, and tougher bank regulation.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2479740583"}