First Republic Bank worked overtime Sunday to reassure customers about the safety of its business after the collapse of Silicon Valley Bank last week raised fears of contagion spreading to the banking industry.
But its stock fell nearly 50% before Monday’s opening despite attempts to reassure clients about the strength of its business.
Early Sunday evening, First Republic executives issued a statement highlighting the “continued strength” of its capital, liquidity, and operations. But that was not all.
Shortly after First Republic’s release, the Federal Reserve unveiled a new Bank Term Funding Program (BTFP), which would allow banks to better manage liquidity. In addition to the BTFP, the Fed also said it is easing terms in its discount window, which allows lenders to provide short-term loans to deal with their liquidity needs.
Apparently, the Fed’s terms were too good to pass up. Later Sunday, First Republic (stock ticker: FRC) said it had “further strengthened and diversified its financial position” with additional liquidity from JPMorgan Chase (JPM) and the Federal Reserve. The total available and unused cash available to First Republic is now more than $70 billion, the bank said. That’s up from the $60 billion it disclosed earlier Sunday. The bank added that this new amount does not include the financing it is entitled to receive under the BTFP.
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“First Republic’s capital and liquidity positions are very strong, and its capitalization remains well above the regulatory limit for well-capitalized banks,” Chairman Jim Herbert and CEO Mike Roeffler wrote late Sunday.
As of the end of 2022, First Republic had $176.4 billion in deposits, according to regulatory filings.
But banking stocks, in general, failed to launch a rebound in the pre-market Monday, even after the US government and regulators stepped in to try to prevent a potential crisis after the sudden collapse of the Silicon Valley bank.
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Shares of the San Francisco-based bank plunged last week amid the Silicon Valley bank meltdown, with First Republic stock plummeting as much as 50% in Friday’s trading session before ending the day down 15%.
On Monday, regional banks were once again the hardest hit, with PacWest Bancorp (PACW) falling 25% and Western Alliance Bancorp (WAL) falling 18%. The pair fell by 55% and 35%, respectively, last week.
Bank of America (BAC), among the most active stocks in early trading, fell 3.8%, after falling 11% last week. Brokerage Charles Schwab (SCHW) posted a decline of 1.8% following last week’s drop of 24%.
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While First Republic doesn’t cater to startups and beleaguered venture capital the way Silicon Valley’s bank did, investors are worried about its concentrated, high-efficiency deposit base that may be looking to move their savings into higher-yielding products, thus eroding the bank’s low-cost source of funding.
Description of John J. Arfstrom, director of research at RBC Capital Markets, called the announcement “positive news for First Republic,” especially in light of the announcements made Sunday by federal regulators to support uninsured depositors at Silicon Valley Bank and Signature Bank.
“Overall, regulatory and Treasury decisions to fully bring depositors into recently failed banks fully and provide eligible institutions access to secured lines of credit should provide near-term confidence in the financing and liquidity terms of FRC and the industry,” Arfstrom wrote.
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Heading into the weekend, analysts acknowledged the challenges First Republic faces, but stressed that the comparisons to Silicon Valley Bank were exaggerated.
“We believe FRC is not SIVB,” UBS analyst Erika Najarian wrote in a note Friday, maintaining her Buy rating on the stock.
Najarian wrote that as of February 2022 — the most recent data — venture capital and private equity deposits made up 8% of First Republic’s business, while it accounted for 52% of Silicon Valley bank’s deposit base. Also, First Republic’s available-for-sale portfolio was 1.7% of assets acquired in the bank while it was 14% in Silicon Valley Bank.
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However, Najarian acknowledged that while First Republic is in a better position than a Silicon Valley bank, it is still likely to face narrowing net interest margin (NIM) pressures in this climate of rising interest rates.
“We stress that NIM constraints are not the same as business model/strategy/balance sheet management issues,” Najarian wrote.
While the First Republic may not have an easy road ahead, Wall Street is hoping cooler heads prevail.
Write to Carleton English at [email protected]
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