First Republic: Future is uncertain after loss of US$ 70 billion – 03/20/2023 – Market

First Republic Bank remained in peril on Monday after a $30 billion cash injection by some of America’s biggest banks last week and frantic efforts to sell a stake in the bank and raise additional resources did little to appease investors and depositors.

Instead, the regional financial institution was on the brink of collapse.

Trading in its shares on the New York Stock Exchange was automatically suspended several times on Monday to prevent them from going into freefall, and they were down 47% at the close of trading.

First Republic has lost about $70 billion in deposits in recent weeks, said two people briefed on its situation — nearly half of its total deposit base at the end of last year.

The attempt to sell a stake in the bank quickly turned into an effort to save it, said two other people briefed on the matter.

The bank has been in a slump since the Silicon Valley Bank crash less than two weeks ago.

“First Republic Bank is well positioned to manage short-term deposit activity,” the bank said in an emailed statement Monday morning. “This support reflects confidence in First Republic and its ability to continue to provide consistently exceptional service to its customers and communities.”

First Republic stocks are in free fall. In the past week alone, the bank has lost about 70% of its market value. On Monday, the First Republic suffered another drop, even as the shares of the other banks that took a hit in last week’s financial panic appeared to stabilize, to some extent.

The deepening problems at First Republic and other banks illustrate how the rush by government and the private sector to find quick fixes to restore confidence in the health of the financial system may have instead exacerbated the financial panic. .

The Federal Reserve (Fed), the central bank of the United States, reported that banks raised more than US$ 150 billion in its rediscount window last week, a record amount. Private equity firms have been invited to look at the assets of troubled banks and choose shares they might find attractive. Executives at large banks are in constant contact with government officials to determine the health status of smaller banks.

The mix of short-term solutions such as loans, efforts to find buyers and reassuring statements by bank executives and government officials have not done much in terms of bolstering confidence in the First Republic. If the interventions had any effect, despite the enormous sums involved, it was to serve as Band-Aids on wounds that would actually need surgery.

Multiple recent downgrades of the credit ratings of banks, including the First Republic, by credit bureaus have sparked fear among investors and depositors. Daily headlines about problems brewing at several banks continue to fuel uncertainty around the sector as a whole, The plethora of problems that brought down Credit Suisse last week and ended with the Swiss bank’s competitor, UBS, on Sunday, for three billion euros, created new dark clouds over the market.

And the news that the Biden administration is in talks with Warren Buffett, the chairman of Berkshire Hathaway, famous for its injection of billions of dollars in capital to shore up Goldman Sachs during the most dangerous moment of the 2008 financial crisis, is just one more sign that the current panic could get even worse.

The First Republic is quickly becoming the symbol of these contradictions; the extraordinary efforts to save the institution seem to be adding to, not reducing, the markets’ concerns.

On Thursday, 11 of the largest banks in the United States gave First Republic, the 14th largest bank in the country, a $30 billion short-term loan to help bolster its position, at a time of mass depositor flight. . The act was understood as a manifestation of support for the First Republic, because the amounts that the banks —including JPMorgan Chase, Bank of America, Citigroup and Wells Fargo— lent were not insured. In other words, the big banks stand to lose their money if the First Republic fails unless the government agrees to pay them back.

First Republic had also been looking for a private equity or other group interested in acquiring a stake.

One potential buyer, a major bank, carried out a detailed investigation of First Republic’s accounts and withdrew from the deal, a person briefed on the matter said.

First Republic has also suffered several downgrades to its credit rating in recent days. On Friday, Moody’s announced a downgrade of the bank due to its greater reliance on short-term borrowing, including money from the Fed and the group of large banks. Paying interest on loans can be expensive for a bank trying to shore up cash.

“Moody’s believes that the high cost of these loans, combined with the bank’s high proportion of fixed rate assets, could have a large negative impact on First Republic’s underlying profitability in the coming quarters,” the agency said in a note. Moody’s also said it was not clear how First Republic would find a way to return to profit.

Standard & Poor’s, in its downgrade note Sunday, said the bank continued to face “substantial business, liquidity, funding and profitability challenges”.

If none of these dynamics surprised more seasoned finance industry veterans, the speed of some banks’ decline shocked them. When Jamie Dimon, chief executive of JPMorgan Chase, was seeking support from other financiers for last week’s rescue operation, he was told by some leaders of other banks that they doubted the attempt would work, said three people briefed on the discussions.

Dimon’s answer was short and blunt: they had to at least try. His bank is now one of those advising the First Republic on how to survive.

Translation by Paulo Migliacci.