March 4, 2024

first republic bank
Shares of First Republic are down 95% this year. If the bank survives, it will be smaller and, for a while, make few if any profits, analysts say.

Michael Nagel/Bloomberg

First Republic Bank’s woes may not last beyond the weekend as federal regulators and big banks continue to discuss ways to save the company.

But analysts say the San Francisco lender still has a chance to survive on its own, despite losing about $100 billion in bank deposits last month and its shares are down 95% this year. If it survives, First Republic will be a shell of its predecessor — a smaller bank that has barely made a profit for quite some time.

Some kind of emergency action now looks more likely, and the key question is whether the big banks or the private sector can orchestrate a deal without direct help from the FDIC. But the details are tricky, with banks appearing more willing to wait out the storm and regulators wanting to act sooner.

Negotiations remain unresolved and in theory they could drag until the big banks have to decide what to do about it They deposited $30 billion in the First Republic mid-March to shore up its balance sheet. The initial term of these deposits is 120 days.

Or, if other depositors who stayed after last month’s chaos end up leaving, the FDIC could be forced to act more quickly. So far, however, regulators have allowed the bank to remain open – a positive indicator that its deposits have held steady.

“This is likely to continue for a while until it no longer occurs,” said Janney Montgomery Scott analyst Tim Coffey.

Below is an overview of three possible scenarios facing banks.

Bank-led solutions

One way out for First Republic is for big banks or other private buyers to buy the struggling company or most of its assets.

Doing so is far from easy. Many of First Republic’s assets are mortgages made to wealthy clients during the pandemic when interest rates were at rock bottom. Those mortgages are now worth far less than they were before last year’s rate hike, which left a $19 billion hole in banks’ balance sheets.

Any First Republic buyer must bear these losses because accounting rules require buyers to assume the current market value of the loan.

The big banks had previously “expressed their willingness to strengthen and support” First Republic and the system as a whole, Autonomous Research analyst David Smith wrote in a note to clients. “But it’s one thing to park relatively small amounts of cash with peers, and quite another to recognize losses through overpayments on bonds and/or loans.”

First Republic is reportedly seeking to sell $50 billion to $100 billion in mortgages and bonds. Bloomberg Newsaccording to reports, buyers can receive preferred stock or other incentives to compensate for buying assets above current prices.

Convincing the chief executives of the big banks to take another shot may be tough, but one potentially persuasive argument is that they’ve already poured $30 billion into First Republic.

Last month, JPMorgan, Bank of America, Citigroup and Wells Fargo each pledged $5 billion in uninsured deposits to First Republic, Goldman Sachs and Morgan Stanley pledged $2.5 billion, while US Bancorp, PNC Financial Services Group, Truist Financial, BNY Mellon and State Street each committed an additional $1 billion.

If First Republic ultimately fails, the big banks risk losing that money, as well as paying the FDIC to help fix the failing institution.

Worse, First Republic’s failure could mean the market is “getting jittery again”, raising concerns about the health of other banks, said Michael Driscoll, an analyst at ratings firm DBRS Morningstar. That pressure is likely to come, he added, although earnings reports over the past two weeks suggest the sector remains healthy and deposits are fairly steady.

“It was a game of confidence,” Driscoll said. “Any break in that confidence could lead to problems, deserved or not.”

Todd Baker, managing principal at Broadmoor Consulting, said one potential option could be for the big banks to convert their $30 billion of deposits into equity in First Republic.Such a move would help restore trust in the industry’s ability to solve problems, and it may also be less costly for the big banks than letting First Republic go under, Baker said. write on LinkedIn.

Another option for the big banks is to extend the duration of their $30 billion in deposits, giving the San Francisco lender more flexibility as it tries to bail out.

“If they do extend beyond 120 days, there’s a way forward,” said Jared Shaw, a bank analyst at Wells Fargo Securities who covers First Republic.

FDIC takes over

If the deal doesn’t materialize, or if First Republic depositors flee amid renewed fears After a brutal earnings report on Monday, the regulator can close the bank and place it in receivership.after last month’s failure Silicon Valley Bank and signature bankanother bank requiring FDIC involvement may be a situation the agency wants to avoid.

Regulators have so far allowed First Republic to stay open, suggesting deposit outflows did not accelerate much after the bank’s first-quarter earnings report. Jaret Seiberg, an analyst at TD Cowen, said that while deposits were far worse than the market had expected, regulators “didn’t realize it” because they monitor banks’ health in real time if they come under significant stress.

Seiberg writes that “seizures were swift only when there was a run of liquidity the banks could not handle,” raising the crucial question of whether uninsured deposits left in the First Republic would survive.

Regulators are likely to give banks time “unless there is a new liquidity run,” Seberg wrote, adding that he sees a broader restructuring led by big banks as the most likely outcome.

Mitchell Glassman, the longtime head of the FDIC’s resolution and receivership division, recalls a previous instance of a troubled bank seemingly “dead in the water,” only to be rescued by a last-minute capital injection.

“As long as it’s open and it’s not deteriorating, there’s still a chance for the white knight to come in and save it,” said Glassman, now a senior executive consultant with the Secura/Isaac Group.

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It is also possible that the First Republic did not require intervention – private or public.

If the bank’s deposits hold steady, it could shrink its balance sheet, become a more traditional bank and find a way to repay the more expensive borrowing it has recently taken on to survive.

That option isn’t cheap, given the massive amounts of debt banks are taking on. The company said this week that short-term borrowings and long-term advances surged to $105.9 billion at the end of the previous quarter, from $14.0 billion in the previous quarter. As banks paid down those borrowings, interest payments also shot up.

First Republic on Monday laid out a plan to cut spending that includes cutting as much as 25% of its workforce, consolidating corporate real estate and cutting executive pay.

“They’re going to have to focus on profitability,” Jeanie Montgomery Scott’s Coffey said. “To be profitable, you have to be small. You have to be more informed about your lending decisions. Maybe you’re not the bank for every high-net-worth individual.”

For a bank that has long focused on wealthy clients — and has grown rapidly by offering cheap mortgages to wealthy clients — such a shift could be difficult to pull off.

“It’s going to be a huge change for this organization,” Coffey said. “That’s not in their DNA.”