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Can First Republic (FRC) Navigate Bank Solvency Jitters?
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Following the failure of Silicon Valley Bank or SVB, First Republic Bank is facing its share of similar concerns over the sustainability of uninsured deposits and unrealized losses in its securities portfolios that could be booked in case of a fire sale.
So far this week, shares of the company have plunged almost 62% to a new 10-year low. The fall in the share price likely resonates with investors’ fears that FRC might face increased funding pressure in case of large deposit withdrawals, which might affect liquidity and erode profitability.
Image Source: Zacks Investment Research
SVB, the primary subsidiary of SVB Financial Group , had faced a bank run, wherein it booked $1.8 billion in losses on securities sales to meet deposit withdrawals.
Now, amid the growing risks of increased deposit withdrawals, First Republic is eyeing strategic options, including a potential sale, per a Bloomberg article that cited people with knowledge of the matter.
The lender is expected to receive takeover interest from larger rivals.
The news of the potential sale can also be driven by the company’s credit rating being downgraded to speculative grade yesterday. S&P Global Ratings downgraded its long-term issuer credit rating on FRC by four notches to BB+ from A-, whereas Fitch Ratings cut the bank’s long-term issuer default rating to BB from A-. These downgrades can increase borrowing costs and raise questions about its financial health.
Bloomberg also reported that the San Francisco-based lender is looking at ways to improve its liquidity that might mitigate deposit outflow risks.
Hence, while fears of overall uncertainty and the above-mentioned market developments have substantially eroded FRC’s valuation proposition, the chances of the bank meeting the same fate as Silicon Valley Bank is less.
Last Sunday, the company obtained additional liquidity access from the Federal Reserve Bank and JPMorgan Chase & Co. (JPM - Free Report) , fortifying its financial position with more than $70 billion in unused funds for operations. This represents a significant amount relative to the company's $212.6-billion total asset position as of 2022 end. The contingency borrowing can be used in the event of a deposit flight.
Additionally, the steps taken by U.S. regulatory agencies should help reduce the contagion risk of bank runs and shore up confidence in the banking system.
The FDIC announced that Silicon Valley Bank depositors would be made whole, irrespective of deposit insurance limits. This should reassure depositors in banks like First Republic of the safety of funds.
Moreover, The Fed announced a new expansive emergency lending program — the Bank Term Funding Program — to provide funding of up to 1 year against collateral, including U.S. treasuries and mortgage-backed securities. Since the collateral will be valued at par, it is significantly reducing the need to sell securities at losses.
Lastly, First Republic's balance sheet mix should also be taken into consideration. At the end of 2022, total investment securities were $31.7 billion and represented only 15% of the total assets, whereas the total loans of $166.8 billion represented 78.5% of its total asset base, making the company less exposed to short-term interest rate risks.
First Republic currently carries a Zacks Rank #4 (Sell).
Image: Shutterstock
Can First Republic (FRC) Navigate Bank Solvency Jitters?
Following the failure of Silicon Valley Bank or SVB, First Republic Bank is facing its share of similar concerns over the sustainability of uninsured deposits and unrealized losses in its securities portfolios that could be booked in case of a fire sale.
So far this week, shares of the company have plunged almost 62% to a new 10-year low. The fall in the share price likely resonates with investors’ fears that FRC might face increased funding pressure in case of large deposit withdrawals, which might affect liquidity and erode profitability.
Image Source: Zacks Investment Research
SVB, the primary subsidiary of SVB Financial Group , had faced a bank run, wherein it booked $1.8 billion in losses on securities sales to meet deposit withdrawals.
Now, amid the growing risks of increased deposit withdrawals, First Republic is eyeing strategic options, including a potential sale, per a Bloomberg article that cited people with knowledge of the matter.
The lender is expected to receive takeover interest from larger rivals.
The news of the potential sale can also be driven by the company’s credit rating being downgraded to speculative grade yesterday. S&P Global Ratings downgraded its long-term issuer credit rating on FRC by four notches to BB+ from A-, whereas Fitch Ratings cut the bank’s long-term issuer default rating to BB from A-. These downgrades can increase borrowing costs and raise questions about its financial health.
Bloomberg also reported that the San Francisco-based lender is looking at ways to improve its liquidity that might mitigate deposit outflow risks.
Hence, while fears of overall uncertainty and the above-mentioned market developments have substantially eroded FRC’s valuation proposition, the chances of the bank meeting the same fate as Silicon Valley Bank is less.
Last Sunday, the company obtained additional liquidity access from the Federal Reserve Bank and JPMorgan Chase & Co. (JPM - Free Report) , fortifying its financial position with more than $70 billion in unused funds for operations. This represents a significant amount relative to the company's $212.6-billion total asset position as of 2022 end. The contingency borrowing can be used in the event of a deposit flight.
Additionally, the steps taken by U.S. regulatory agencies should help reduce the contagion risk of bank runs and shore up confidence in the banking system.
The FDIC announced that Silicon Valley Bank depositors would be made whole, irrespective of deposit insurance limits. This should reassure depositors in banks like First Republic of the safety of funds.
Moreover, The Fed announced a new expansive emergency lending program — the Bank Term Funding Program — to provide funding of up to 1 year against collateral, including U.S. treasuries and mortgage-backed securities. Since the collateral will be valued at par, it is significantly reducing the need to sell securities at losses.
Lastly, First Republic's balance sheet mix should also be taken into consideration. At the end of 2022, total investment securities were $31.7 billion and represented only 15% of the total assets, whereas the total loans of $166.8 billion represented 78.5% of its total asset base, making the company less exposed to short-term interest rate risks.
First Republic currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.