Business, Finance & Tech

First Republic may not survive, even after two multibillion-dollar bailouts

(CNN) — First Republic Bank is in a fight for its survival. The past few weeks have been brutal for the San Francisco-based lender. Now, some analysts say a collapse of the bank is imminent. "It’s becoming clearer each day" that First Republic is "toast," said Don Bilson at Gordon Haskett, in a note Wednesday. "The only question that really needs to be answered is whether the [Federal Deposit Insurance Corporation] moves in before the weekend or during the weekend, which is when it usually does its thing." The bank reported on Monday that its total deposits fell 41% in the first quarter, sending its stock to record lows. Shares were down about 21% in afternoon trading Wednesday after plunging by 49% on Tuesday. The stock’s trading was halted numerous times on Tuesday and Wednesday as its rapid decline triggered volatility-triggered timeouts by the New York Stock Exchange. First Republic said in its latest earnings call that is exploring its strategic options, Wall Street code for searching 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 just three viable options left. Option one: Stay the course One option is that First Republic stays the course and "muddles along as a standalone company." That would mean waiting for its securities and loans to mature. "That’ll be a long road, but they do have some liquidity that will enable them to continue," said Chiaverini. First Republic CEO Michael Roffler attempted to assure investors in an earnings call Monday that the bank had enough liquidity to do that. The lender, he said, had twice the available liquidity of uninsured deposits (excluding the $30 billion received from large banks). Option two: Appeal to big banks (or private equity) The second option, said Chiaverini, would be to try to sell some of its loans and securities at the same cost they bought them for. In exchange, the buyer would receive a preferred equity interest in the company. That’s a hard sell, said Chiaverini, since those assets would probably sell for well above market rate. First Republic’s bonds maturing in 2046 are currently trading at just 43 cents on the dollar. But big banks find themselves 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 pretty penny and will be funded mostly by large banks, costing them tens of billions of dollars. That’s on top of $30 billion in bailout led by JPMorgan Chase last month. Earlier in March, JPMorgan also extended a $70 billion line of credit to First Republic. It essentially comes down to impact analysis for banks: Pay a few billion dollars now or a few more billion dollars later. Investors who are buying First Republic stock are clinging to the hope "that a bailout package spearheaded by the largest US banks will leave something left for equity holders," wrote Bilson. "We suppose that isn’t completely far fetched, though we have a hard time imagining Jamie Dimon or Brian Moynihan or Jane Fraser each agreeing to buy $5 billion of mortgages and Treasuries for prices that are well above the market," he added. Either way, private equity could still swoop in and save the day, said Chiaverini. "Private equity would be a more likely buyer and participant in that sort of transaction," he said. "They’re willing to take that sort of risk, whereas the big banks aren’t in the business of purchasing preferred equity in in other banks." Bloomberg reported Tuesday that the lender is looking to sell as much as $100 billion of its loans and securities in a bid to balance its books. First Republic declined to comment to CNN on the story. Other reports say that First Republic is considering asking big banks to help with such a deal. Option three: Receivership The biggest fear that investors have is that First Republic goes into receivership, said Chiaverini. When a struggling bank 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 repay its creditors. Going into receivership can have significant consequences for the bank’s customers, shareholders, and employees, as well as for the wider financial system. This is the worst possible option for equity holders and preferred equity holders, added Chiaverini, as they would see their money wiped out in that scenario. That’s what happened to Silicon Valley Bank on March 10 when the California Department of Financial Protection and Innovation took possession of and closed Silicon Valley Bank and on March 12 Signature Bank was closed by the New York State Department of Financial Services. Both were put into the "receivership" of the FDIC, which sold off the banks at a steep discount. While all depositors were made whole, shareholders were not compensated — they lost everything. President Joe Biden made it clear at the time that he had no interest in protecting investors. "They knowingly took a risk and when the risk didn’t pay off, investors lose their money. That’s how capitalism works," he said. The FDIC, meanwhile, is actively considering lowering First Republic’s financial ratings, according to a Bloomberg report. A lower rating would hinder the bank’s ability to use the Fed’s overnight lending program and an emergency lending program launched last month in the wake of Silicon Valley Bank’s collapse to prevent further turmoil. But Joe Brusuelas, principal and chief economist for RSM US told CNN that "at the end of the day in a banking crisis, it’s the central banks who are the shot callers." Officials at the Federal Reserve are likely worried that First Republic’s collateral is no longer sufficient enough to borrow against and will soon begin pressuring the bank to arrange an orderly wind down. Officials at the central bank will also likely communicate to potential private capital providers that now is the time to consider making a deal with First Republic, Brusuelas said. The Federal Reserve declined to comment and the FDIC did not immediately respond to request for comment from CNN. Stopping the spread First Republic sits at the center of the ongoing banking chaos, and investors are worried that its woes could indicate more trouble to come in the sector. But the bank’s situation is unique, in that it is unusually vulnerable to liquidity problems, Chiaverini said. When the banking crisis erupted, about two-thirds of First Republic’s deposits were uninsured with the Federal Deposit Insurance Corporation. That’s lower than the 94% at Silicon Valley Bank — but at the end of last year, First Republic had an exceptionally high ratio of 111% for loans and long-term investments to deposits, according to S&P Global — meaning it has loaned and invested more money than it has in deposits. Investors don’t seem to be too worried about more contagion in the sector. The SPDR S&P Regional Banking ETF (KRE) that tracks the broader regional bank sector was up 0.6% on Wednesday. Western Alliance Bancorp (WAL) grew by 0.4% and PacWest (PACW) gained nearly 12.7%. The-CNN-Wire ™ & © 2023 Cable News Network, Inc., a Warner Bros. Discovery Company. All rights reserved.

By: Ceci Partridge

April 26, 2023

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