First Republic (FRC) shares plunged 49% on Tuesday after the bank surprised investors and analysts by disclosing an outflow of more than $100 billion in deposits in March.
The market reaction has raised new questions about the fate of a San Francisco lender who was at the center of last month’s banking turmoil.
Failure “is definitely a risk,” Autonomous Research analyst David Smith told Yahoo Finance on Tuesday. “Deposits have been much worse than feared.”
The bank laid out its survival strategy on Monday. He said he plans to increase his insured deposits, reduce the borrowings he uses to cover customer withdrawals, shrink his balance sheet and cut his workforce by 20-25% to cut expenses.
She is also pursuing other “strategic” options, including a sale or additional fundraising.
Bloomberg reported that the bank is considering divesting $50 billion to $100 billion in securities and long-term mortgages to facilitate a possible fundraising.
CNBC and Reuters also flagged the creation of a “bad bank” as another possibility, referring to a technique frequently used during the S&L crisis in the 1980s and 1990s to manage troubled bank assets.
First Republic shares, which are now down 93% for the year, were briefly halted for volatility on Tuesday. Other banking stocks also fell, including some of the First Republic’s regional rivals.
One was PacWest (PACW), a Beverly Hills-based lender that ended the day down 9%.
PacWest said after the market closed that it lost 17% of its deposits, or $5.7 billion, in the first quarter and then recovered $700 million as of April 24. It also recorded a loss of $1.2 billion due to a goodwill impairment charge related to “the decline in our stock price due to recent market volatility.”
Its stock, which is down 55% year-to-date, was up about 14% in after-hours trading at 4:30 a.m. ET.
HomeStreet (HMST), a Seattle lender that reported earnings on Monday, also fell 35% on Tuesday.
Analysts said First Republic, which was the nation’s 12th-largest bank as of Dec. 31, faces a lot of uncertainty as it tries to recover from last month’s chaos.
“First Republic appears to be on hold and burning fuel,” Evercore analysts said in a new research note. Wells Fargo analysts said in a separate note that the existence of the First Republic “is very much at stake.”
“The future of this company is very uncertain,” CI Roosevelt associate partner Jason Benowitz added in an interview with Yahoo Finance. The First Republic, he added, “has lost so much in deposits that it has to replace that funding somehow, so it does that by borrowing.” The borrowing “will really weigh on their profitability both in the quarter and going forward.”
Wedbush lowered its earnings estimates for this very reason, noting that heavy losses on deposits would weigh on earnings.
“Where does the First Republic go from here?” Wedbush said in his memo. “Our base case is that First Republic continues to move forward as a stand-alone company,” referencing an earlier memo from April that said First Republic faced a “Hobsonian choice.”
Even a sale of First Republic at $0 per share is unlikely, Wedbush said in that earlier note, because any buyer would still have to pay billions to absorb unrealized losses on its balance sheet.
Carlyle Group co-founder David Rubenstein told Yahoo Finance earlier this month that the federal government will have to help First Republic find a buyer because of this “hole” in the lender’s balance sheet.
“I think First Republic Bank is clearly on a watch list, and probably someone at some point will buy it. But the challenge is that it needs government help,” Rubenstein said more earlier this month on Yahoo Finance Live.
A lot of money is straddling its destiny. Everyday investors have bet $245 million on First Republic stocks since the fall of Silicon Valley Bank, according to Vanda Research, the third highest inflow to a specific bank stock behind Bank of America (BAC) and Charles Schwab (SCHW).
It also has one of the highest levels of interest among so-called short sellers betting on the stock’s decline, according to analytics firm S3 Partners, accounting for $480 million in such bets at the time. course of the last 30 days.
The First Republic “will be a sentiment indicator for the sector,” Vanda said in a note last week.
The new hand wringing over First Republic followed the release of its first-quarter results on Monday. Its profit of $269 million was down 30% from the fourth quarter and 33% from the year-ago period.
What surprised most observers was the number of deposits lost in March. As of March 9, the day before Silicon Valley Bank was seized by regulators, its deposits stood at $173.5 billion, down slightly from year-end. On March 10, it began to experience “unprecedented deposit outflows.”
The total net outflow at the end of March was $72 billion, but the actual number was over $100 million after removing a temporary $30 billion injection of uninsured deposits from 11 of the largest major banks in the country. These deposits must remain at the First Republic for 120 days, according to a person familiar with the rescue.
The bank said on Monday that outflows began to stabilize the week of March 27 and deposit activity “remained flat” through April 21. Its balance as of Friday was $102.7 billion, down 1.7% from the end of the quarter the bank assigned. tax payments from seasonal customers.
“Despite the uncertainty of the past two months, and although average account size has declined, we have retained more than 97% of the customer relationships that trusted us at the start of the first quarter,” said the CEO of First Republic. , Michael Roffler, during a conference call. following the publication of the results.
The company did not respond to analyst questions.
Click here for the latest stock market news and in-depth analysis, including events moving stocks
Read the latest financial and business news from Yahoo Finance