By Nicole Goodkind, CNN
First Republic Bank is in a fight for its survival.
The last few weeks have been brutal for San Francisco-based lender. Now some analysts say the bank’s collapse is imminent.
“It’s becoming clearer by the day” that First Republic is “toast,” Gordon Haskett’s Don Bilson said in a note Wednesday. “The only question that really needs to be answered is whether the [Federal Deposit Insurance Corporation] he moves in before the weekend or during the weekend, which is when he usually does his thing.”
The bank reported Monday that its total deposits fell 41% in the first quarter, sending its shares to record lows. The shares fell about 21% in afternoon trading on Wednesday after falling 49% on Tuesday.
The share price was halted several times on Tuesday and Wednesday as its rapid decline led to holding times triggered by volatility on the New York Stock Exchange.
First Republic said in its latest earnings call that it is exploring its strategic options, Wall Street’s code for looking for a white knight. The company noted that it is “taking actions to strengthen its business and restructure its balance sheet.”
David Chiaverini, managing director of equity research at Wedbush Securities, told CNN there are only three viable options left.
Option One: Stay the Course
One option is for First Republic to stay the course and “continue as an independent company.” That would mean waiting for your securities and loans to mature.
“It will be a long road, but they have some liquidity that will allow them to continue,” Chiaverini said.
First Republic Chief Executive Michael Roffler tried to reassure investors in an earnings call on Monday that the bank had sufficient liquidity to do so. The lender, he said, had twice the available liquidity of uninsured deposits (excluding the $30 billion received from the big banks).
Option two: appeal to the big banks (or private capital)
The second option, Chiaverini said, would be to try to sell some of his loans and securities at the same cost that they were bought for. In exchange, the buyer would receive a preferred stake in the company’s share capital.
That’s a tough sell, Chiaverini said, as those assets would likely sell for well above market. First Republic bonds due 2046 are currently trading at just 43 cents on the dollar.
But the big banks are between a rock and a hard place. If First Republic fails, the FDIC will likely want to avoid systemic risk and offer insurance to all depositors, even those without insurance. That will cost a penny and will be financed mainly by big banks, costing them tens of billions of dollars. That’s on top of the $30 billion bailout led by JPMorgan Chase last month. In early March, JPMorgan also extended a $70 billion line of credit to First Republic.
Essentially it boils down to impact analysis for banks: pay a few billion dollars now or a few billion more dollars later.
Investors buying First Republic shares are clinging to the hope “that a bailout package spearheaded by the largest US banks will leave something for shareholders,” Bilson wrote.
“We suppose it’s not entirely far-fetched, although we have a hard time imagining Jamie Dimon, Brian Moynihan or Jane Fraser each agreeing to buy $5 billion worth of mortgages and Treasuries at prices that are well above market,” he added. .
Either way, private capital could still step in and save the day, Chiaverini said. “Private equity would be a more likely buyer and participant in that type of transaction,” he said. “They’re willing to take that kind of risk, whereas the big banks are not in the business of buying preferred shares in other banks.”
Bloomberg reported Tuesday that the lender is looking to sell up to $100 billion of its loans and securities in a bid to balance its books. First Republic declined to comment with CNN on the story. Other reports say that First Republic is considering asking the big banks to help with such a deal.
Option Three: Receivership
The biggest fear investors have is that First Republic will go into receivership, Chiaverini said. When a bank in trouble goes into receivership, it means that a regulatory authority or government agency takes control of the bank and its assets, usually with the goal of liquidating the bank’s assets to pay its creditors. Going into suspension of payments can have significant consequences for the bank’s customers, shareholders and employees, as well as for the financial system in general.
This is the worst possible option for equity holders and preferred stock holders, Chiaverini added, as they would lose their money in such a scenario.
That’s what happened to Silicon Valley Bank on March 10 when the California Department of Financial Protection and Innovation took over and closed Silicon Valley Bank and on March 12 Signature Bank was closed by the New State Department of Financial Services. York. Both were put into the “court settlement” by the FDIC, which sold the banks at a price big discount.
While all the depositors recovered, the shareholders were not compensated: they lost everything. President Joe Biden was cleared at that time it had no interest in protecting investors. “They knowingly took a risk and when the risk wasn’t worth it, investors lost their money. This is how capitalism works,” he said.
Meanwhile, the FDIC is actively considering downgrading First Republic’s financial ratings, according to a Bloomberg report. A lower rating would hamper the bank’s ability to use the Fed’s overnight lending program and an emergency lending program launched last month after the collapse of Silicon Valley Bank to avoid further turmoil.
But Joe Brusuelas, chief economist and head of RSM US, told CNN that “at the end of the day, in a banking crisis, it’s the central banks that rule.”
Federal Reserve officials are likely concerned that First Republic’s collateral will no longer be enough to borrow and will soon begin to pressure the bank to stage an orderly liquidation. Central bank officials are also likely to communicate to potential providers of private capital that now is the time to consider doing a deal with First Republic, Brusuelas said.
The Federal Reserve declined to comment and the FDIC did not immediately respond to CNN’s request for comment.
stop the spread
First Republic is at the center of the ongoing banking chaos, and investors are concerned that its problems could signal more trouble in the sector.
But the bank’s situation is unique, as it is unusually vulnerable to liquidity problems, Chiaverini said.
When the banking crisis broke out, about two thirds of First Republic’s deposits were not insured with the Federal Deposit Insurance Corporation. That’s less than the 94% at Silicon Valley Bank, but at the end of last year, First Republic had an exceptionally high 111% ratio for long-term loans and investments to deposits, according to S&P Global, meaning it has lent e invested more money than you have in deposits.
Investors do not appear to be overly concerned about further contagion in the sector. The SPDR S&P Regional Banking ETF (KRE) which tracks the broader regional banking sector rose 0.6% on Wednesday. Western Alliance Bancorp (WAL) grew 0.4% and PacWest (PACW) gained nearly 12.7%.
The CNN Wire
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