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On Tuesday, Moody's Investors Service, the ratings arm of Moody’s Corp. (MCO - Analyst Report), downgraded its outlook on First Republic Bank (FRC - Analyst Report) to ‘Negative’ from ‘Stable.’ The downward revision was propelled by the uncertainty over First Republic Bank’s capability in meeting prudent underwriting standards while maintaining significant loan growth.

However, the rating agency affirmed the bank's standalone bank financial strength rating (BFSR)/baseline credit assessment (BCA) at C/a3 along with reaffirmation of the long and short-term deposit ratings at A3 and Prime-2, respectively.

Rationale Behind Downgrade

The downgrade by the rating agency follows First Republic Bank's above-average loan growth which came in at 22% in 2013. Moody’s concerns stem due to ongoing competition among banks, which might restrict First Republic Bank to maintaining such high loan growth.

Moreover, the rating agency believes such high loan growth rates might risk the bank's above-average asset quality performance. Therefore, the rating agency has come up with the downgrade.

Notably, First Republic Bank's asset quality remains above average when compared with peers as of Dec 31, 2013, reflecting the bank’s prudent underwriting standards. Specifically, net charge-offs came in at 0.05% and nonperforming assets equaled 2% of tangible common equity and reserves as of Dec 31, 2013.

Moody's believes First Republic Bank's organic growth supports its strong asset quality performance and the bank is well placed with a solid capital position and consistent profitability. Therefore, the agency has reaffirmed the abovementioned ratings.

Our Viewpoint

The rating revisions are valuable for companies as this plays a major role in preserving investor confidence in the stock and help boost its creditworthiness in the market.

Though a sound capital position, improving credit quality and strategic business models will bode well in the long run for First Republic Bank, we believe the unsettled economy, still low interest rate environment and stringent regulatory issues remain matters of concern.

Currently, First Republic Bank carries a Zacks Rank #3 (Hold). Some better-ranked banks include Preferred Bank (PFBC - Snapshot Report) and Central Valley Community Bancorp (CVCY - Snapshot Report) with a Zacks Rank #1 (Strong Buy).

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