More banking jitters as First Republic investigates asset sales and ‘bad bank’ options, source says

  • Plans to reduce balance sheet and explore options
  • Q1 deposits plunge more than $100 billion from Q4
  • Stocks hit record high
  • Wall Street braces for more pain to come

April 25 (Reuters) – First Republic Bank (FRC.N) faces limited and difficult options to turn around its business with the creation of a “bad bank” or possibilities of selling assets, a source said Close to the case, after the lender showed the scale of deposit flight during last month’s banking crisis.

First Republic reported a drop of more than $100 billion in deposits during the quarter following the biggest turmoil to hit the banking sector since 2008. Shares fell to a record low on Tuesday, closing by nearly 50%.

“If someone were to acquire them … there would be significant write-downs that would have to be taken on some of the assets given the rate cycle,” said Christopher Wolfe, head of North American banks at Fitch Ratings, referring to the the mortgage portfolio and the bank’s securities portfolio.

“Options are very difficult and probably very expensive, especially for shareholders,” Wolfe said. “Who will bear the cost?”

A ripple effect was felt among other banks and the wider market. Regional bank PacWest Bancorp (PACW.O) fell 9%, Western Alliance Bancorporation (WAL.N) 6%, Zions Bancorp (ZION.O) 5% and brokerage Charles Schwab Corp (SCHW.N) 4%. Big banks were also hit with JPMorgan (JPM.N) down 2%.

The regional KBW Banking Index (.KRX) fell 4%, the broader S&P 500 Banking Index (.SPXBK) fell 2.6% and broader markets expressed concern over the decline in US equities and falling US Treasury yields.

First Republic said Monday it was “pursuing strategic options” to quickly strengthen the bank, without providing details.

The lender was exploring all options, a person familiar with the matter said on Monday, speaking on condition of anonymity as the discussions were private.

The source said the bank wanted the U.S. government to help by summoning parties that could back the fortunes of the San Francisco-based First Republic, including private equity firms and major lenders.

The options include an asset sale of up to $100 billion, a source familiar with the matter said on Tuesday. A second source familiar with the matter said potential buyers had been approached by advisers to the First Republic with the idea of ​​receiving preferred stock in exchange for buying assets. Bloomberg News previously flagged the possibility of asset sales and said buyers could receive incentives such as warrants or preferred stock.

David Chiaverini, an analyst at brokerage firm Wedbush Securities, said if First Republic was willing to distribute preferred stock in exchange for selling loans above market value, “that will allow them to kind of avoid to realize the losses while at the same time helping to capitalize the bank.”

The possibility of a bad bank, previously reported by CNBC, is a crisis-like method of isolating troubled financial assets. Chiaverini said such a scenario would be a challenge because the bank’s loans and securities are nearly all performing.

“So it’s hard to even describe him as a good asset and a bad asset,” Chiaverini said. “And that’s why this scenario seems difficult.”

FRC declined to comment on specific options.

Wall Street analysts expect the challenges to continue throughout the year after two U.S. bank failures last month created a liquidity crunch at a slew of regional lenders.

Wells Fargo analysts said reported deposit outflows were much worse than Wall Street estimates and at a “level that could prove very difficult to return to.”

The spotlight on banking also attracted retail investors. First Republic was the most-ordered stock on Fidelity’s platform on Monday, ending the day with a 12.2% gain, with a 64%/36% buy/sell split.

The First Republic ticker was also among the most active on retail investor-focused on Tuesday morning.

However, about 36% of the bank’s stock free float was short, according to FIS Astec Analytics. Data from another provider, S3, showed that short interest rose $389.8 million to $945.5 million in the past 30 days, and now accounts for 32.5% of its shares available for trading.

Deposit flight has been a focus of investors’ concerns as clients move capital into money market funds that generate higher yields or larger “too big to fail” institutions.

Reuters Charts


“First Republic appears to be on hold and burning fuel. In short, the bank has lost significant deposits and plans to reduce its asset base accordingly,” Evercore ISI analysts said.

The bank is in shock as it tackles the twin challenges of assuring customers that their deposits remain safe and investors that it has liquidity to emerge from the crisis.

“While deposits have stabilized since the end of the quarter, the company’s liquidity issues have turned into earnings issues,” said analysts at Piper Sandler.

The industry-wide upheaval has led the KBW regional banking index to contract nearly 22% this year, while First Republic stocks have plunged around 87% in the fallout.

“The question is whether the risk was specific to the First Republic or whether it will lead to larger banking problems,” brokerage JonesTrading wrote in a note.

First Republic said Monday it plans to trim its balance sheet and cut expenses by cutting executive pay, cutting office space and laying off 20-25% of employees in the second quarter.

“We expect the NIM to come under significant pressure in the second quarter, which will have a material negative impact on the bank’s earning power,” Wedbush analysts said.

Concerns over the health of the bank last month prompted major power brokers including US Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell and JPMorgan (JPM.N) CEO Jamie Dimon to put in place an unprecedented $30 billion bailout deal.

Reporting by Manya Saini in Bengaluru and Lance Tupper in New York; Additional reporting by Siddarth S; Editing by Dhanya Ann Thoppil and Krishna Chandra Eluri

Our standards: The Thomson Reuters Trust Principles.

Manya Saini

Thomson Reuters

Manya Saini reports on prominent US publicly traded financial companies, including Wall Street’s largest banks, card companies, asset managers and fintechs. Also covers initial public offerings on US exchanges as well as news and regulatory developments in the cryptocurrency industry. Contact: 9958867986

Leave a Comment