First Citizens BancShares
Moat: 2/5
Understandability: 3/5
Balance Sheet Health: 4/5
First Citizens BancShares is a large regional bank holding company, primarily operating across the Southeastern United States with a history of mergers and acquisitions, offering commercial and retail banking and other financial services.
Investor Relations Previous Earnings Calls
The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.
First Citizens BancShares (FCNCA) operates primarily in the Southeast United States. While not a dominant market leader in most locations, it’s a significant player in several local markets. This somewhat fragmented market presence, combined with its regional focus, makes the competitive landscape complex.
The company’s main revenue streams are:
- Net interest income (NII): The largest revenue driver comes from lending activities, the difference between the interest earned on loans and the interest paid on deposits. The bank’s NII is influenced by interest rate fluctuations and loan growth.
- Fee and commission income: The second largest stream is revenue from services such as wealth management, brokerage, overdraft fees, credit card fees, and service charges. These fees are less cyclical than NII but heavily depend on customer activities.
- Trading Income : The third component is trading income which varies based on the market, market volatility, and the volume of assets traded
- Other income: Other income includes service charges, fees from lending and investments, and miscellaneous income not directly attributable to operations.
Industry Trends: The banking sector has been marked by increased digital adoption, technological innovation, and regulatory changes. It also is undergoing consolidation, with larger banks acquiring smaller regional players. A highly competitive environment has intensified margin pressures for most banks. Interest rates have fluctuated quite dramatically over the last several years, with central banks including the federal reserve, sharply increased rates and now are facing pressure to lower them again.
Moat Analysis: FCNCA does not possess a strong, wide economic moat. However, I will provide a rating of 2/5 with an explanation for why it is not higher.
- Switching Costs: While switching costs for customers of retail bank are there (primarily due to inconvenience and time spent on transitioning), these costs are not very high and other banks can often compete and attract customers. However, for their more sophisticated commercial banking business, there are moderate switching costs due to the size, complexity, and time constraints of changing banks. This might give the bank some pricing power for those types of business clients.
- Cost Advantages: There aren’t significant economies of scale in running a bank, where a bigger bank provides significant cost advantage. Because of this they have to compete on service, brand, etc. If cost advantages do come into play, smaller banks might be at a slight disadvantage.
- Network Effect: There is almost no benefit for banks regarding the network effects of their businesses.
- Intangible Assets: FCNCA does not hold significant intangible assets.
While the company enjoys a good reputation in their region and has benefited from a sticky customer base, there’s nothing that will provide the business a considerable edge over competitors.
The Moat Rating is 2/5
Risks to the Moat: Several risks threaten FCNCA’s ability to sustain its competitive advantages and profitability.
- Interest Rate Sensitivity: Fluctuations in interest rates significantly affect the bank’s net interest income. Both a rapid increase or decrease in rates can negatively affect profitability. If the company is unable to manage the asset-liability mismatch in rate increases their profits might come down.
- Increased Competition: The banking industry remains highly competitive, with both traditional banks and new financial technology companies vying for market share. New entrants might quickly take market share or put downward pressure on prices. Also, increasing consolidation makes it hard for small banks to compete.
- Economic Downturn: An economic recession can lead to loan losses, decreased loan demand, and an increase in defaults, all which reduce the banks revenue and profitability. A decline in consumer confidence also hurts fee income and growth.
- Regulatory Scrutiny: Regulatory changes such as increasing capital requirements or restrictions on overdraft fees, can hinder the profitability of banks. In fact, the SEC and various other agencies have increased scrutiny on companies.
- Cybersecurity Threats: Banks are vulnerable to cyberattacks and these can significantly effect brand, reputation, and the financial health of the business. Data breaches and other security issues can cause significant financial and legal difficulties.
Business Resilience
Despite the risks above, FCNCA’s business shows a moderate level of resilience:
- Established Customer Base: A long history and established presence in their operating area provides it with a stable customer base and a loyal following.
- Geographic Diversification - The bank operates in multiple states across the Southeast which can shield it from negative impacts in one particular region. It’s a good geographical diversification, but can still be prone to macroeconomic downturns or large regional shocks.
- Diversified Product Portfolio - FCNCA offers a range of products, including loans, deposits, wealth management and brokerage, limiting risks related to just one product.
Financial Analysis
FCNCA’s financials tell a story of stability but not extreme outperformance. Key points include:
- Revenue Growth: Revenue growth has been decent, primarily driven by both organic growth and acquisitions. Their mergers have significantly grown the bank.
- Profitability: Both net income and ROIC have fluctuated in recent years. The recent sharp increase in interest rates has given FCNCA tailwinds and margins might improve. The bank has a history of consistent net income. The bank’s margins and profitability seem to be dependent on macroeconomic conditions and external forces.
- Capital Adequacy: They maintain a solid Tier 1 capital ratio above regulatory minimums which is very important for banks. This allows them to absorb shocks and protects them in financial downturns.
- Strong Credit Ratings While they do not have a rating from all agencies, the main three rating agencies (Fitch, Moody’s, and S&P), all provide ratings within investment grade.
- Recent Acquisition: The most recent acquisition of SVB has significantly increased the scale and size of the bank. Management expects cost saving and profitability as the transition continues. We should be wary of the new debt.
The Balance Sheet Health is 4/5
Recent Developments and Management Commentary
- Sizably Increased Scale of Business: the bank has greatly increased its size and scale of business after the acquisition of SVB.
- Lowering Costs They’re working to lower costs and realize synergies of the combined business. If successful, this can further strengthen their bottom line and profitability.
- Integration: Management has stated that integrating SVB is their priority and has a clear strategy for the process. This is crucial since integration is complex and has a high potential to be a success or failure of this acquisition.
- Risk Management: Management highlighted their focus on risk management and their expertise in doing it. This is a critical factor in a bank’s long term success and their handling of the current risks related to the SVB acquisition are important.
- Uncertain Macroeconomic Environment: Management notes that the uncertain economic environment, specifically fluctuations in interest rates and a potential slowdown is a risk they must manage through good practices.
The company has faced increased scrutiny from regulatory authorities due to their large size, as well as due to the volatility in the banking sector that caused the downfall of Silicon Valley Bank, that FCNCA acquired. This is another risk for the company.
Understandability: FCNCA is an operating business that relies on complicated financial factors, namely interest rates, to make a profit. The management is not always entirely in control of the profitability of the business, since they heavily depend on external factors. The number and variety of businesses and the various risk factors make it slightly more difficult to understand. Therefore, the understandability is 3/5.