After the collapse of a Silicon Valley bank last week sparked fears of contagion in the banking industry, First Republic Bank worked overtime Sunday to reassure customers about the safety of its business.
But despite efforts to reassure customers about the strength of its business, its stock fell close to 50% ahead of the open Monday.
On Sunday evening, First Republic executives issued a statement in which they highlighted the “continued strength” of its capital, liquidity and operations. But that’s not all.
After the launch of the First Republic, the Federal Reserve released a new Bank Term Funding Program (BTFP) that would allow banks to better manage their liquidity. In addition to the BTFP, the central bank also said it will relax conditions in its discount window, which allows lenders to take short-term loans to handle their liquidity needs.
Apparently, the Fed’s regulations were too good to pass up. Later on Sunday, First Republic (ticker: FRC ) said it had “further enhanced and diversified its financial position” with additional liquidity from JPMorgan Chase (JPM) and the central bank. First Republic’s total available, unused cash flow is now more than $70 billion, the bank said. That’s up from $60 billion disclosed the previous Sunday. The bank added that this new amount does not include eligible funds under BTFP.
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“First Republic’s capital and liquidity positions are very strong, and its capital is above regulatory limits for well-invested banks,” Chairman Jim Herbert and CEO Mike Roffler wrote late Sunday.
At the end of 2022, First Republic had $176.4 billion in deposits, according to regulatory filings.
But bank stocks in general failed to start a rebound in Monday’s early market, even after the U.S. government and regulators intervened to try to stem a potential crisis after the sudden collapse of Silicon Valley Bank.
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Shares of the San Francisco-based bank faltered last week amid a slump in Silicon Valley banking, with First Republic’s shares falling as much as 50% in Friday’s trading session, before ending the day down 15%.
Regional banks were again the worst hit on Monday, with PacWest Bancorp ( PACW ) down 25% and Western Alliance Bancorp ( WAL ) down 18%. Last week the pair fell 55% and 35% respectively.
Bank of America ( PAC ) stock was the most active in early market trading, falling 3.8% after falling 11% last week. Brokerage firm Charles Schwab ( SCHW ) fell 1.8% following last week’s 24% drop.
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While First Republic hasn’t helped the troubled start-up and venture capital industry as much as Silicon Valley Bank did, investors worry about its concentrated, well-rounded, deposit base, which could move their savings to higher-yielding products. , thereby eroding the source of low-cost funding for the bank.
Joan G., director of research at RBC Capital Markets. Orfstrom called the announcement “positive news for First Republic,” especially after federal regulators issued announcements on Sunday to support uninsured deposits at Silicon Valley Bank and Signature Bank.
“Broadly speaking, regulatory and Treasury decisions to fully place depositors in recently failed banks and provide collateralized loans to qualified institutions should provide near-term confidence in financial and liquidity conditions for the FRC and the industry,” Arfstrom wrote.
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Over the weekend, analysts acknowledged the challenges First Republic faces, but insisted comparisons to Silicon Valley banking are overstated.
“We believe FRC is not SIVB,” UBS analyst Erica Najarian wrote in a note Friday in which she maintained her buy rating on the stock.
As of February 2022—the most recent data available—venture capital and private equity deposits accounted for 8% of First Republic’s business, while it accounted for 52% of Silicon Valley Bank’s deposit base, Najarian wrote. Also, First Republic’s sales portfolio accounted for 1.7% of the bank’s earning assets and 14% for Silicon Valley Bank.
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However, Najarian acknowledged that while First Republic is better positioned than Silicon Valley Bank, it may still face pressure to lower net interest margin (NIM) in an environment of rising rates.
“We emphasize that NIM pinches are not the same as business model/strategic/balance sheet management issues,” Najarian wrote.
Although the First Republic has not had an easy road, Wall Street believes cooler heads will prevail.
Write to Carleton English at [email protected]
