Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

After a while, the big bank conference calls all start to sound the same.

If you had better things to do than listen to those of JPMorgan Chase, Bank of America and Wells Fargo, here's a quick paraphrasing of the highlights:

Yes, earnings were down, but it was a tough environment last quarter. We executed well and we're cutting expenses -- oh boy, are we cutting expenses. Clients just aren't in the mood for trading or doing deals much when the markets are that volatile. Don't worry, we've socked away plenty in reserves in case our energy industry clients go belly up. Did we mention we're cutting expenses? And just wait until interest rates finally rise. Look, we're totally going to get our act together with this whole living will thing, don't you worry about it, OK?

And, in fact, the smooth talking seems to be working. The KBW Bank Index is up 5 percent in two days and is 19 percent above its low in February. Rather than some sort of irrational exuberance, that rally probably speaks more to the irrational skepticism that caused the 30 percent drop that preceded it. 

Still, with earnings expectations crashing hard, the rebound has yet to bring most share prices positive for the year. However, there is one anomaly that's not too hard to spot: 

Leader of the Pack
First Republic is the only stock in the KBW Bank Index that's up in 2016 and since the index peaked in July.
Source: Bloomberg

First Republic Bank's shares are up about 175 percent since the company went public in 2010, leaving just about every other bank stock in its dust even as it returned to the equity market to raise capital five times and increased assets above the $50 billion level where regulators require it to get on a treadmill for a stress test. (The bank once belonged to Merrill Lynch, tagged along for the ride to Bank of America during the financial crisis and was then sold to private equity investors before going public.)

What, you may ask, is First Republic doing right? Actually, it's probably as much a matter of what it's not doing.

As CEO and Chairman James H. Herbert emphasized on the company's post-earnings conference call on Thursday: "We would note that we do not engage in investment banking or capital markets trading, we have no direct exposure to energy, and we have no international lending or operations." 

It's an example of how diversifying is not always a good thing, and also an example of what can happen to units of big banks that are set free to fend for themselves. As the managements of universal banks have been scrambling to deal with brush fires in their sprawling empires such as souring energy credits, slowdowns on trading desks and deal cancellations, First Republic stuck to its knitting with private and business banking and wealth-management services for clients in affluent parts of California and the East Coast:

Bicoastal Bank
First Republic's business is focused on California and the Northeast
Source: Bloomberg Intelligence, FDIC; as of 6/30/2015

Its share price is not the only detail that makes it stick out. Its growth is also head-and-shoulders above most peers, fueled by strong loan growth, an enviable net interest margin of 3.2 percent, and  a 31 percent increase in wealth-management revenue (thanks in part to a stream of hires from Credit Suisse).

Look at it compared with the other big banks that have reported first-quarter results so far, as well as their long-term growth estimates: 

Earnings Growth
First Republic showed strong earnings growth in the first quarter, and its long-term estimates are high
Source: Bloomberg
Note: Long-term figure based on Bloomberg estimates for the next three to five years.

Of course, long-term earnings estimates are written in even fainter pencil than short-term estimates, which have been erased and written lower at an alarming rate for the bigger banks this year. And the outperformance of the stock has left it as the only member of the KBW index trading above 2 times book value,  so it's certainly hard to argue it's a bargain on a relative basis. The number of analyst buy ratings on the stock has dipped to 43.5 percent from 65 percent in 2014, according to Bloomberg data, and its average share-price target implies only a 1.7 percent expected gain over the next 12 months. Still, Morgan Stanley tipped its hat to the bank on Thursday by including it on its “30 for 2019” list of stocks for three-year holding period, and it was added to its old parent Bank of America Merrill Lynch's "U.S. 1" list of top stock picks last month.

It will be interesting to see whether First Republic can keep up the growth that's allowed it to be such a standout, especially as attention turns to inflated home and business values in Silicon Valley.

"More recently, we have seen our private equity and venture capital clients exercise greater caution, which has slowed the pace of their investing and in turn has decreased borrowings on capital call lines of credits," First Republic Chief Banking Officer Michael D. Selfridge said on the call Thursday. 

First Republic has managed to dodge the ailments that have sapped the biggest banks. It's biggest risk now may be a case of "unicorn flu."

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net