When a company acquires another, especially one that is facing difficulties, it is common for the acquiring business’ stock price to drop. However, First Citizens BancShares defied this trend when it bought Silicon Valley Bank (SVB) out of government receivership, leading to a remarkable 50% surge in its stock value.

Even six months after the acquisition, Wall Street remains optimistic about First Citizens’ future. Recently, analysts at J.P. Morgan initiated coverage on this Raleigh, N.C.-based lender, giving it an Overweight rating and setting a target price of $1,850. This target implies a potential gain of 34% from its current trading levels.

J.P. Morgan analyst, Steven Alexopoulos, expressed his positive outlook on the acquisition by stating, “As we assess the potential of integrating the acquired SVB franchise with First Citizens, we are optimistic that despite remaining challenges, the best days for the SVB franchise may lie ahead. With SVB now under the strong leadership of First Citizens, the opportunity for First Citizens shareholders seems even more compelling.”

According to FactSet data, out of eight analysts covering the stock, all except one rated it equivalent to a Buy. Even the analyst with the lone Hold rating foresees the stock climbing to $1,675, which still signifies significant growth potential compared to its recent trading value of $1,384.

The positivity surrounding First Citizens stems partially from its proven track record in bank acquisitions. Over the past three decades, the company has acquired around 50 banks, almost half of which were bought from the Federal Deposit Insurance Corp (FDIC). This demonstrates First Citizens’ ability to successfully integrate troubled operations into its business and propel growth.

Another factor supporting the optimistic sentiment is Wall Street’s belief that First Citizens selectively acquired the successful aspects of SVB, as opposed to the elements that led to its downfall.

Alexopoulos further emphasized this by stating, “We believe that Silicon Valley Bank had one of the most valuable underlying businesses in the U.S., serving as the bank of the innovation economy.” In his analysis, SVB’s failure primarily resulted from investing a significant influx of deposits received in 2021 and 2022 into long-term securities that plummeted in value as the Federal Reserve began raising interest rates.

First Citizens Poised for Growth Following SVB Acquisition

SVB’s recent troubles were not unique, as U.S. banks collectively faced unrealized losses of over $550 billion in their securities portfolios, as reported by the FDIC. SVB’s situation was further aggravated by customer withdrawals, leading to the sale of long-dated debt to raise cash and thereby crystallizing these losses.

As of the end of Q2, SVB accounted for a significant portion of First Citizens’ loans and deposits – 44% and 29% respectively. This acquisition also positions First Citizens as the successor to SVB’s prominent role as a financier for start-ups and venture capital firms, facilitating connections between nascent businesses and VC investors.

According to Alexopoulos, venture capital investments are expected to total $30 billion in Q3, making a slight decline from the preceding four quarters. However, market analysts anticipate a recovery in the sector, which would be beneficial for First Citizens given its strong presence in the start-up ecosystem.

Alexopoulos projects that First Citizens will outperform other banks covered by J.P. Morgan in the coming years. The bank is expected to achieve revenue growth rates of 7.3% and 5.3% in 2024 and 2025 respectively, while peers are only forecasted to see growth rates of 0.4% and 3.8%. Furthermore, First Citizens’ earnings are projected to increase by 1.2% in 2024 and 9% in 2025, surpassing the respective averages of peers at 0.9% and 6.3%.

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