JPMorgan Chase
and other big banks stepped in this week to shore up
First Republic Bank
to the tune of $30 billion, but their efforts have done little to restore Wall Street’s faith in regional lenders.
First Republic’s rescue plan, involving many of America’s largest banks, including
Bank of America
(BAC),
Citigroup
(C), and JPMorgan Chase (JPM), initially brought some relief to the shares. A group of 11 lenders are depositing $30 billion in the bank for a minimum of 120 days in a show of confidence following bank runs that led to the recent failures of Silicon Valley Bank and Signature Bank.
The stock closed 10% higher, but the rally was short-lived. After the market closed, First Republic suspended its dividend and disclosed that it recently had borrowed from the Federal Reserve’s discount window, a move often associated with financial distress.
“The significance of the changes in FRC’s balance sheet in just one week are staggering, in our view, and along with the suspension of the common stock dividend, paints a very dire outlook for the company and shareholders,” Christopher McGratty, analyst at Keefe, Bruyette & Woods, wrote Friday.
That wasn’t the intention of Thursday’s rescue plan, which also included
Wells Fargo
(WFC),
Goldman Sachs
(GS),
Morgan Stanley
(MS),
Bank of New York Mellon
(BK),
PNC Financial Services Group
(PNC), State Street,
Truist Financial
(TFC), and
U.S. Bancorp
(USB).
The move reflects their “confidence in the country’s banking system,” the banks said in a joint statement. “America’s largest banks stand united with all banks to support our economy and all of those around us,” they added.
Wall Street is doubtful. Analysts seem certain that the $30 billion of deposits buy First Republic time until it can be sold, but the sale wouldn’t be the type that investors would cheer.
Analysts at Wedbush downgraded First Republic stock to Neutral from Outperform Friday, with a $5 price target. They said a sale of the bank under a scenario of distress would result in minimal residual value for shareholders, noting that First Republic’s tangible book value as of Dec. 31 was negative $73 a share when marked at fair value. That equates to a $13.5 billion capital hole for a potential acquirer, they said.
“A sale of FRC to a larger entity should be beneficial for the banking system as a whole, and should help ease contagion fears,” Wedbush said. “However, given the fair value of marks embedded in both its loan and securities portfolio, we find it difficult to come up with a realistic scenario where there’s residual value for FRC common equity shareholders.”
All of that also presupposes that First Republic could easily find a buyer. The bank has an enviable list of wealth-management clients but larger banks, perhaps the natural acquirers of First Republic, may feel apprehensive about buying a troubled institution. During the financial crisis of 2008-09 JPMorgan and Bank of America stepped in to rescue firms such as Bear Stearns, Washington Mutual, and Countrywide Financial, only to find themselves saddled with billions of dollars of legal liabilities, a factor that could give pause to potential acquirers of First Republic.
Silicon Valley Bank and Signature Bank, which collapsed over the past week, also have yet to find buyers. “No buyer has emerged for SIVB or SBNY, perhaps due to bitter memories of costly GFC-era acquisitions,” analysts at
BMO
wrote Friday.
Others on Wall Street cited the peculiarity of the First Republic rescue, with Peter Boockvar of The Boock Report writing: “What a weird way to save a bank.”
“Imagine if Janet Yellen called Walmart, Costco, Target and Amazon and encouraged them to buy stuff from another retailer, whose business has been teetering, each month to keep them alive,” Boockvar wrote, noting that the minimum term of the deposits is 120 days.
That allows the bank to “fight another day,” according to Evercore ISI analysts, but amounts to a “temporary solution.”
Wall Street is trying to assess what is next for regional banks. Even ahead of Thursday’s actions, Wall Street assumed that smaller banks will soon be facing tougher regulations and higher capital requirements , both of which would harm the earnings profile of the sector.
“These potential increases in regulations will weigh on normalized returns driving more consolidation longer term. Moreover, we are also more cautious on balance sheet growth and credit availability as banks adapt balance sheets for the potential new requirements,” David Konrad, analyst at KBW, wrote Wednesday.
The First Republic news Thursday actually stoked new fears on Wall Street.
Activist investor Bill Ackman said the intervention only served to increase the risk that strains on banks will hit more lenders. “The result is that First Republic Bank default risk is now being spread to our largest banks,” he said in a tweet late Thursday. “Spreading the risk of financial contagion to achieve a false sense of confidence in First Republic is bad policy,”
Analysts at BMO said that guaranteeing uninsured deposits at fallen institutions like Silicon Valley Bank and Signature Bank, as well as the First Republic’s rescue, “may have actually accelerated deposit outflows from other regional banks that might not receive help if required.”
The BMO team is looking for an “all-clear” signal that would point to funding stability across the banking sector, which could lead to a buying opportunity, but it is still cautious.
“Even if ‘all-clear’ were signaled, we worry about solvency implications of changes to securities capital treatment resulting directly from this rate-inspired liquidity crisis. All this before the credit cycle has even begun. Bank stock performance could remain subdued for some time,” the BMO team wrote.
The American depositary shares of
Credit Suisse
(CS)–another bank under pressure—fell more than 5.3% by midday. It climbed close to 20% in the previous sessions after the bank said it would borrow up to 50 billion Swiss francs ($54 billion) from Switzerland’s central bank.
The stock had plummeted 24% on Wednesday after its largest shareholder ruled out investing any more in the bank. It remains down 32% since the beginning of March.
Despite concern about the health of banks spreading to Europe, the European Central Bank increased interest rates by half a percentage point Thursday, sticking to the plan it set out last month.
The ECB is the first major central bank to make a rate decision since the turmoil triggered by the collapse of Silicon Valley Bank. The Federal Reserve is due to make its next decision on March 22, and the Bank of England the day after.
Write to Callum Keown at callum.keown@barrons.com
