Is First Republic Bank profiting from Income Inequality?

Many investors bet that America’s income inequality will get worse. For example, First Republic Bank’s share price rose from $118.18 on 17 January 2020 to $155.59 on 20 January 2021.

Moreover, Mr. Market paid $163.30 for First Republic Bank (NYSE: FRC) on 12 January 2021. I think income inequality is driving First Republic’s share price because First Republic is a wealth management company.

Specifically, First Republic (FRC) offers personal banking, business banking, and private wealth management services to high-net worth individuals; a popular euphemism for rich people. I think investors buy FRC stock because they think the rich will have more money and a greater need for First Republic’s services.

First Republic’s only customers appear to the be the rich. The bank has offices in such high-income zip codes as San Francisco, Palm Beach, Jackson (Jackson Hole), Wyoming, Palo Alto, Manhattan, Orange County, Napa, Boston, and San Diego.

Does Joe Biden’s Election explain First Republic’s growth?

One reason why investors are bullish on First Republic (NYSE: FRC) could be Joe Biden’s (D-Delaware) victory in the presidential election.

Biden is a moderate pro-business Democrat with a history of promoting pro corporate policies. For example, Biden is a long-time proponent of a balanced budget, less entitlement spending, lower taxes, and free trade. Moreover, Biden is pro law and order and favors an imperialist foreign policy.

Hence, Biden is the president wealthy Americans want. Biden is anti-racist, pro business, internationalist, tough on law and order, and anti-socialist. Biden opposes Medicare for All (Single Payer Health Insurance), and he is lukewarm on a cash stimulus for ordinary people. However, Biden loves giving tax breaks and federal cash to big business.

To elaborate, investors think Biden will favor policies that put more cash in rich people’s bank accounts. Hence, there could be more business for First Republic and other wealth managers.

A Politically Connected Bank

Conversely, First Republic has connections to the outgoing Trump Administration.

The bank’s website boasts, “Jim Herbert, (First Republic’s) Founder, Chairman, and CEO, has been named to the Community Development Advisory Board of the U.S. Department of the Treasury’s Community Development Financial Institutions (CDFI) Fund.” Moreover, First Republic has invested $443 million in the CDFI Fund’s community development corporations and Minority Depository Institutions (MDIS) the same press release states.

Thus, First Republic has political connections which could help it make more money from the federal government. Particularly, if Biden can convince Congress to pass his $1.9 trillion stimulus plan.

Does First Republic Bank Make Money?

First Republic Bank (FRC) makes money. First Republic reported a quarterly gross profit of $1.08 billion and an operating income of $379.25 million on 31 December 2020.

Notably, the quarterly gross profit grew from $877.46 million on 31 December 2019 and the quarter operating income grew from $309.04 million on 31 December 2019. Plus, First Republic’s quarterly revenues grew from $1.094 billion on 31 December 2019 to $1.179 billion a year later.

However, Stockrow estimates First Republic’s quarterly revenue growth rate fell from 12.56% on 31 December 2019 to 7.72% on 31 December 2020. Conversely, Stockrow reported no quarterly operating cash flow for First Republic on 31 December 2020. In contrast, First Republic reported a negative quarterly operating cash flow of -$863.79 million on 31 December 2019.

First Republic Makes Money from Financing

Importantly, First Republic makes money from Financing. First Republic (FRC) reported a quarterly financing cash flow of $4.419 billion on 30 September 2020. The quarterly financing cash flow fell from $5.887 billion on 31 December 2019.

Notably, Stockrow reported no cash from financing for First Republic on 31 December 2020. First Republic reported a quarterly ending cash flow of $591.98 million on 30 September 2020 and no quarterly ending cash flow on 31 December 2020.

First Republic finished 2020 with more cash. First Republic had $5.095 billion in cash and short-term investments on 31 December 2020. The cash and short-term investments grew from $1.7 billion on 31 December 2019.

What Value Does First Republic Bank Offer?

First Republic Bank (NYSE: FRC) had $142.502 billion in total assets on 31 December 2020. The total assets grew from $116.264 billion on 31 December 2020.

Thus, First Republic gained assets and cash in 2020. Therefore, First Republic is a growing company.

I consider First Republic a growth and income investment with a high margin of safety. For instance, First Republic Bank will pay a 20₵ quarterly dividend on 27 January 2021.

The FRC dividend grew from 19₵ on 30 October 2019. Overall, First Republic offered a forward annualized dividend of 80₵ and a 51% dividend yield on 21 January 2021.

If you are concerned about income inequality, First Republic’s success will scare year. However, if you are looking for growth investment in wealth management, First Republic Bank (FRC) is worth investigating.