More bank jitters as First Republic probes asset sales, 'bad bank' options, source says

 April 26, 2023

By Manya Saini, David French and Saeed Azhar

A trader works at the post where First Republic Bank stock is traded on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., March 16, 2023. REUTERS/Brendan McDermid/File Photo

April 25 (Reuters) - First Republic Bank (FRC.N) faces dwindling and tough options to turn around its business with the creation of a 'bad bank' or asset sales possibilities, a source familiar with the matter said, after the lender showed the extent of deposit flight during last month's banking crisis.

First Republic reported a more than $100 billion plunge in deposits in the quarter in the aftermath of the biggest turmoil to hit the banking sector since 2008. Shares on Tuesday slid to a record low, closing down nearly 50%.

"If someone were to acquire them ... there's going to be some big writedowns that would have to be taken against some of the assets given the rate cycle," said Christopher Wolfe, head of North American banks at Fitch Ratings, referring to the bank's mortgage loan book and securities portfolio.

"The options are very challenging and probably very costly, especially for shareholders," Wolfe said. "Who's going to bear the cost?"

A ripple effect was felt among other banks and the broader 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) was down 4%. Large banks were also hit with JPMorgan (JPM.N) down 2%

The KBW Regional Banking Index (.KRX) dropped 4%, the broader S&P 500 bank index (.SPXBK) fell 2.6% and broader markets showed concern with U.S. stocks lower and U.S. Treasury yields falling.

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

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

The source said the bank wanted the U.S. government to help by convening parties that could buoy San Francisco-based First Republic's fortunes, including private equity firms and big lenders.

Options include an asset sale of up to $100 billion, a source familiar with the situation said on Tuesday. A second source familiar with the matter said that possible buyers were contacted by advisors for First Republic with the idea of receiving preferred equity in exchange for buying assets. Bloomberg News earlier reported the chance of asset sales and said buyers might receive incentives such as warrants or preferred equity.

David Chiaverini, analyst at brokerage firm Wedbush Securities said that if First Republic was willing to hand out preferred equity in exchange for selling loans above market value then "it will allow them in a way to sidestep from realizing the losses while at the same time help to capitalize the bank."

The bad bank possibility, earlier reported by CNBC, is a crisis-type method of isolating financial assets that have problems. Chiaverini said such a scenario would be a challenge as the bank's loans and securities are nearly all performing.

"So it's tough to even describe it as good asset and bad asset," Chiaverini said. "And that is why this scenario looks challenging."

FRC declined comment on the specific options.

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

Analysts at Wells Fargo said the reported deposit outflows were much worse than Wall Street estimates and at a "level that could prove very hard to come back from."

The spotlight on the bank has also drawn in retail investors. First Republic was the most ordered stock on Fidelity's platform on Monday, ending the day at a 12.2% gain, with a 64%/36% buy/sell split.

First Republic's ticker was also among the most active on retail investor-focused Stocktwits.com on Tuesday morning.

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

Deposit flight has been at the center of investor concerns as clients move capital toward money market funds that bring in higher returns or larger 'too-big-to-fail' institutions.

DEPOSITS DARKEN OUTLOOK

"First Republic appears to be in a holding pattern and is burning fuel. In short, the bank has lost meaningful deposits and is planning to shrink its asset base accordingly," said analysts at Evercore ISI.

The bank has been reeling as it navigates the twin challenges of assuring customers their deposits remain safe and investors that it has liquidity to emerge from the crisis.

"Although deposits have stabilized since quarter-end, the company's liquidity questions have turned into earnings questions," said analysts at Piper Sandler.

The sector-wide upheaval has led to the KBW Regional Banking Index contracting nearly 22% this year, while First Republic shares dived roughly 87% in the fallout.

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

First Republic said on Monday it plans to shrink its balance sheet and slash expenses by cutting executive compensation, paring back office space and laying off 20% to 25% of employees in the second quarter.

"We forecast the NIM to come under substantial pressure in Q2, negatively impacting the bank's earnings power significantly," analysts at Wedbush said.

Last month, concerns about the bank's health had prompted top power brokers including U.S. Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and JPMorgan's (JPM.N) CEO Jamie Dimon to put together an unprecedented $30 billion rescue 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

 

https://www.reuters.com/business/finance/first-republics-100-bln-deposit-flight-jolts-investors-gloom-drags-regional-2023-04-25/

April 25, 2023  3:17 PM GMT+7  Last Updated a day ago

First Republic Bank deposits tumble more than $100 billion as it explores options

By Mehnaz Yasmin and Nupur Anand

A First Republic Bank branch is pictured in Midtown Manhattan in New York City, New York, U.S., March 13, 2023. REUTERS/Mike Segar/File Photo

April 24 (Reuters) - First Republic Bank (FRC.N) shares sank more than 20% after the closing bell on Monday as it said deposits plunged by more than $100 billion in the first quarter and it was exploring options such as restructuring its balance sheet.

The deposit slump overshadowed profits that beat expectations for the beleaguered company, shored up through deposits from U.S. banking giants last month after two regional lenders collapsed.

San Francisco-based First Republic plans to shrink its balance sheet and slash expenses by cutting executive compensation, paring back office space, and laying off nearly 20% to 25% of employees in the second quarter, it said Monday.

The company also aims to increase its insured deposits and cut borrowings from the Federal Reserve Bank.

"We're taking steps to meaningfully reduce our expenses to align with our focus on reducing the size of the balance sheet," CEO Mike Roffler said in a post-earnings conference call. The briefing lasted less than 15 minutes and ended without executives taking questions from analysts.

Managers' decision to forgo a question-and-answer session with analysts was reminiscent of calls during the 2008 financial crisis, said Timothy Coffey, an analyst at Janney Montgomery Scott LLC who had dialed in.

First Republic also said it was "pursuing strategic options" to help expedite progress on strengthening the bank, without providing details.

The lender was studying all options open to it, according to a person familiar with the matter, speaking on condition of anonymity because the discussions were private.

The source said the bank was looking for the U.S. government to help by convening parties who could potentially play a role in buoying First Republic's fortunes, including private equity firms and big lenders.

First Republic came into intense focus after Silicon Valley Bank (SVB) and Signature Bank collapsed last month, shaking the confidence in U.S. regional banks and prompting customers to move billions of dollars to bigger institutions.

"With the closure of several banks in March, we experienced unprecedented deposit outflows," said Neal Holland, First Republic's finance chief.

Deposits fell to $104.47 billion in the first quarter from $176.43 billion in the fourth quarter despite the lender getting a $30 billion lifeline in combined deposits from U.S. banking heavyweights, including Bank of America Corp. (BAC.N), Citigroup Inc. (C.N), JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N).

Without the $30 billion of deposits provided by big banks, the decline in deposits would have been almost $102 billion.

"We had estimated net outflow of deposits to be around $40 billion," Coffey told Reuters. "Losing that much in deposits and having to replace them with borrowings is very expensive."

TOUGH ROAD AHEAD

Still, deposits began to steady in the week of March 27 and have remained stable through April 21, the company said.

The lender earned $1.23 a share in the first three months ended March, comfortably above the 85 cents per share analysts estimated for the quarter, according to Refinitiv data.

The results showed the extent of the damage on First Republic after last month's banking crisis, which fueled concern of a panic spreading through the financial system.

It also faces a difficult path to revive its fortunes, banking analysts and industry experts say.

For years, it lured high net-worth clients with preferential rates on mortgages and loans, making it more vulnerable than regional lenders with less-affluent customers.

This will discourage potential buyers of the bank because "a large mortgage portfolio at incredibly low rates generating little revenue is not very attractive," said Robert Conzo, CEO of New York-based investment advisory firm, The Wealth Alliance.

First Republic's loan book and investment portfolio also became less valuable as interest rates rose.

The bank's choices are limited when it comes to selling assets. Divesting the mortgage arm would likely result in losses, while selling the wealth management unit would get rid of one of its most lucrative businesses, said David Smith, an analyst at Autonomous Research.

Wealth management "is one of the strongest parts of the bank remaining, so I think they'd be cautious about selling that," he added.

The bank is looking at ways it can downsize if its attempts to raise new capital fail, Reuters reported last month, citing three people familiar with the matter.

Rating agency Moody's also downgraded First Republic alongside several other banks on Monday. The lender had its rating reduced by three notches, which was more severe than peers including Western Alliance Bancorp (WAL.N), Comerica Inc (CMA.N), and US Bancorp (USB.N).

Investors are combing through results from several regional banks to gauge their health and ability to absorb future financial shocks. The largest U.S. banks reported windfall profits from higher interest payments in the first quarter, largely brushing off the turmoil.

"It's just a really tight picture for First Republic based on its earnings," said Autonomous Research analyst Smith. "Getting the bank in shape will be a lot of work, to put it mildly."

Reporting by Mehnaz Yasmin in Bengaluru; Editing by Lananh Nguyen

https://www.reuters.com/business/finance/first-republic-bank-deposits-falls-41-shares-slide-2023-04-24/