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First Republic Bank’s shares closed down 50% on Tuesday, a day after the mid-sized US bank announced a dramatic slump in deposits.
On Monday the San Francisco-headquartered reported a more than $100bn plunge in deposits in the quarter in the aftermath, sparking fears swirling that it could be the third bank to fail after the collapse of Silicon Valley Bank and Signature Bank.
Amid the biggest turmoil to hit the banking sector since 2008, the bank now faces tough options to turn around its business with the creation of a “bad bank” or asset sales possibilities, a source familiar with the matter said, after the lender showed the extent of deposit flight during last month’s banking crisis.
“If someone were to acquire them … there’s going to be some big writedowns that would have to be taken against some of the assets given the rate cycle,” Christopher Wolfe, head of North American banks at Fitch Ratings, told Reuters, referring to the bank’s mortgage loan book and securities portfolio.
“The options are very challenging and probably very costly, especially for shareholders,” Wolfe said. “Who’s going to bear the cost?”
First Republic said on Monday it was “pursuing strategic options” to quickly strengthen the bank, without providing details.
The lender was studying all options, a person familiar with the matter said on Monday, speaking on condition of anonymity because the discussions were private.
The source said the bank wanted the US government to help by convening parties that could buoy San Francisco-based First Republic’s fortunes, including private equity firms and big lenders.
Options include an asset sale of up to $100bn, a source familiar with the situation said. Bloomberg News earlier reported the chance of asset sales and said buyers might receive incentives such as warrants or preferred equity.
The bad bank possibility, earlier reported by CNBC, is a crisis-type method of isolating financial assets that have problems.
The latest woes in the banking sector were felt among other banks and the broader market with the KBW Regional Banking Index dropping 3.8% and the broader S&P 500 bank index down 2.6%.
Wall Street analysts expect challenges to extend through the year after failures at Silicon Valley Bank and Signature last month created a liquidity crunch at a slew of regional lenders.
The bank has been reeling as it navigates the twin challenges of assuring customers their deposits remain safe and investors that it has liquidity to emerge from the crisis.
“Although deposits have stabilized since quarter-end, the company’s liquidity questions have turned into earnings questions,” said analysts at Piper Sandler.
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The sector-wide upheaval has led to the KBW Regional Banking Index contracting nearly 22% this year, while First Republic shares dived roughly 87% in the fallout.
“The question is whether the risk was First Republic specific or whether it will lead to larger banking concerns,” brokerage JonesTrading wrote in a note.
First Republic said on Monday it plans to shrink its balance sheet and slash expenses by cutting executive compensation, paring back office space and laying off 20% to 25% of employees in the second quarter.
“We forecast the NIM to come under substantial pressure in Q2, negatively impacting the bank’s earnings power significantly,” analysts at Wedbush said.
Last month, concerns about the bank’s health had prompted top power brokers including US Treasury Secretary Janet Yellen, Federal Reserve chair Jerome Powell and JPMorgan’s CEO Jamie Dimon to put together an unprecedented $30bn rescue deal.
Reuters contributed to this story
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