Investors’ confidence in First Republic Bank is waning. Shares were sliding more than 30% in pre-market trading on Thursday (Mar. 16) after closing on Wednesday (Mar. 15) 75% lower than at the start of March.
The stock was trading at an all-time low of around $20 a share when markets opened, but recovered slightly, reaching above the $24 mark, after the Wall Street Journal reported that a group of banks, including JP Morgan Chase and Morgan Stanley, were discussing a potential deal for a cash injection into First Republic Bank. The situation remains volatile.
The California-based full-service bank and wealth management company’s fate hangs in the balance after the recent collapse of another mid-sized bank, Silicon Valley Bank (SVB), which marked the second-largest bank failure in US history, and the shutdown of crypto lenders Silvergate and Signature Bank.
SVB and Signature collapsed after depositors made withdrawal requests the banks could not fulfill. Like SVB, First Republic’s clientele includes wealthy clients and companies whose deposits exceed the threshold for federal insurance. On Sunday (Mar. 12), the bank announced that it received additional liquidity from JPMorgan and the Federal Reserve.
To calm nerves, executive chairman Jim Herbert—who served as CEO since he founded the bank in 1985 up until 2022—told CNBC’s Jim Cramer on Monday (Mar. 13) that the bank was not witnessing outsize outflows. Despite the reassurances, concerns that First Republic could experience a similar run on deposits led S&P Global Ratings and Fitch Ratings to slash the bank’s ratings to “junk” on Wednesday. The downgrade came a day after another rating agency, Moody’s, placed First Republic and six other banks under review.
The San Francisco bank appears to be wary of a possible liquidity crisis. It’s been exploring strategic options, including a potential sale, Bloomberg reported yesterday, sparking the share price drop.
Charted: First Republic Bank’s stock sinks
First Republic Bank’s financial health, by the digits
$212 billion: The bank’s assets at the end of 2022
$176.4 billion: The bank’s deposits as of the end of last year
About 70%: Share of the bank’s deposits that are uninsured because they exceed the $250,000 Federal Deposit Insurance Corporation (FDIC) insured limit–the maximum amount depositors can retrieve in the event of a bank failure. It’s above the median of 55% for medium-sized banks and the third-highest in the category after Silicon Valley Bank and Signature Bank, both of which had 97% and 90% uninsured deposits respectively.
61%: How much the bank’s shares have fallen over the last week as fears abound that it’ll be the next domino to fall in the burgeoning US banking crisis
More than $70 billion: The bank’s unused liquidity—cash it can use to respond to potential customer withdrawals—courtesy “the additional borrowing capacity from the Federal Reserve, continued access to funding through the Federal Home Loan Bank, and ability to access additional financing through JPMorgan Chase & Co.” which in turn “increases, diversifies, and further strengthens First Republic’s existing liquidity profile,” according to the company. Even if 40% of the bank’s depositors pulled out, this funding would cover it, says Gary Alexander, financial blogger at Seeking Alpha.
Will First Republic Bank collapse?
While both First Republic Bank and SVB are similarly-sized banks with wealthy clients on the surface, their balance sheets tell a different story.
“First Republic has more than 2x the loan volume of SVB, and less than a quarter of its loan exposure,” wrote Seeking Alpha’s Alexander. “This means that First Republic is more heavily weighted toward longer-duration assets that aren’t as sharply exposed to short-term interest rate risk and devaluations.”
Unlike SVB, changes in interest rates will have less of a bearing on First Republic.
Quotable: US treasury secretary Janet Yellen says the US banking system is “sound”
“I can reassure the members of the committee that our banking system remains sound and that Americans can feel confident that their deposits will be there when they need them. This week’s actions demonstrate our resolute commitment to ensure that depositors’ savings remain safe. Importantly, no taxpayer money is being used or put at risk with this action.” —US treasury secretary Janet Yellen’s prepared remarks ahead of a Senate Finance Committee hearing today (Mar. 16).
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The stock of First Republic Bank has been on a steep decline in the past few weeks, leaving investors to wonder what lies ahead for the beleaguered company. Despite company officials’ efforts to assure the public of their long-term stability, investors remain concerned about the fact that the bank’s financials have not been able to show a meaningful improvement since its stock started to tumble.
It is unclear at this point what First Republic Bank’s next steps may be; however, analysts have put forth a few potential scenarios. Firstly, the bank may decide to undertake a restructuring of its assets in order to reduce its risk profile. This would involve changes to the bank’s capital structure and the movement of certain assets and liabilities in order to maximize the bank’s return on equity.
Furthermore, the bank may look to raise additional capital in the form of debt and equity in order to bolster its balance sheet and pay down debt. This could involve the issue of new equity shares, as well as the issue of debt, such as bonds and loans. The bank could also look to acquire smaller banks in order to expand its operations, leveraging its current assets and customer base.
Finally, the bank may decide to enter into strategic partnerships with other institutions in order to diversify its services and operations. This could involve partnerships with other banks and financial institutions, as well as non-traditional sources of capital, such as angel investors and venture capitalists.
Overall, it remains to be seen what the future holds for First Republic Bank, but investors should be aware of the fact that the bank appears to be taking steps to address its current situation. It is likely that the bank’s management will make decisions in the coming weeks, which may have a major impact on the bank’s stock price and performance. In the meantime, investors would be wise to keep a close watch on the company’s performance and developments.
