First Republic Bank FRC -43.66% decrease; red down pointing triangle shares have been hit hard following the failures early in March of two large U.S. regional banks, Silicon Valley Bank and Signature Bank, and the global bank panic that has ensued.
The San Francisco company reported first-quarter results on Monday afternoon. First Republic’s deposits fell by $100 billion over the course of the period ended March 31, and net income dropped by a third.
The company expressed confidence that it will be able to survive, reflecting in part the March rescue efforts by larger banks and the stability seen throughout the banking system in the ensuing weeks. But First Republic is preparing sharp cutbacks in order to do so, planning a “significant” reduction in executive pay and cutting its workforce by as much as a quarter by midyear.
“With the stabilization of our deposit base and the strength of our credit quality and capital position, we continue to take steps to strengthen our business,” the company said in a press release.
Shares dropped in after-hours trading. First Republic shares are trading just above their all-time low set on March 20. Investors remain unsettled about the prospects of the firm and many other midsize U.S. lenders. Here’s a look at what’s behind the chaos.
First Republic, the 14th-largest U.S. commercial bank, was one of the banks swept up in the contagion that followed the March 10 failure of Silicon Valley Bank. Similarities center on their size and their largely uninsured deposit bases.
Like many U.S. regional banks, First Republic has been facing worries that its depositors will leave.
Silicon Valley Bank failed because its core business of banking venture-capital firms and their startups was bleeding funds, creating a continuing cash need. But the firm had invested heavily in long-term bonds whose value was badly hurt by the Federal Reserve’s interest-rate increases over the past year, meaning it could sell them only at a loss.
When Silicon Valley Bank tried to raise cash anyway, its depositors, largely business customers whose accounts were well above the $250,000 Federal Deposit Insurance Corp. protection limit, fled. Uninsured depositors across the system took notice and First Republic, which had some two-thirds of its deposits in uninsured accounts, came under scrutiny.
“With the closure of several banks in March, we experienced unprecedented deposit outflows,” First Republic said Monday. “We moved swiftly and leveraged our high quality loan and securities portfolios to secure additional liquidity,” it added, meaning it used pledged assets as collateral to borrow from others.
Shares of First Republic and many other financial firms were briefly lifted in mid-March after the biggest banks in the U.S. swooped in to shore up First Republic. Under the plan, 11 banks including JPMorgan Chase & Co. placed $30 billion in deposits at First Republic, using their own funds, confirming an earlier report by The Wall Street Journal.
JPMorgan, Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. are each making a $5 billion uninsured deposit into First Republic. Morgan Stanley and Goldman Sachs Group Inc. are kicking in $2.5 billion apiece, while five other banks are contributing $1 billion each.
The move in part sought to restore confidence in regional banks by showing that the largest firms, which are widely perceived as beneficiaries of the unrest, are willing to put their money to work there.
“This show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system,” said a group of U.S. regulators led by Treasury Secretary Janet Yellen.
It didn’t. The day after the rescue was announced, the bank said it was suspending its dividend; its shares slumped further, fueling speculation over whether First Republic has a future as a stand-alone bank.
The selling has continued despite the Journal reporting that at one point JPMorgan chief Jamie Dimon was leading discussions among large banks aimed at bolstering First Republic’s capital.
Meanwhile, fears about the health of banks leapt an ocean and prompted Swiss officials to hastily engineer a takeover of giant Credit Suisse Group by its rival, UBS Group. Regulators on both sides of the Atlantic said the global financial system remains resilient. But investors remain on edge, as shown in March 24’s largely unexplained rout of European banks, centering on Germany’s Deutsche Bank.
That isn’t clear. The company said Monday afternoon that it was trying to tighten its belt to adapt to the new realities of an economy that will force on banks of all sorts higher costs for borrowing money from depositors and intense competition for many business lines.
“We are working to restructure our balance sheet and reduce our expenses and short-term borrowings,” the company said.
Previously, First Republic hired bankers to seek out alternatives for its board to consider, but the options appear limited. Regional banks remain under stress generally, and the firm’s bonds are still trading at a steep discount to face value.
Meanwhile, the free fall in First Republic stock has wiped out billions of dollars in shareholder wealth. The shares traded as high as $147 this year but recently fetched $16.
As is often the case, insiders appear to have fared somewhat better. Top executives of First Republic Bank sold millions of dollars of company stock in the two months before the bank’s shares plummeted, the Journal reported. The firm also paid family members of its founder, James Herbert, millions of dollars for work at the lender in recent years, including for consulting services related to interest rates and risk. Those are facts that won’t sit well with many investors regardless of the bank’s ultimate fate.
Corrections & Amplifications
Credit Suisse Group AG shares rallied in Zurich. An earlier version of this article incorrectly referred to the bank as Credit Suisse Group Inc.
Summary:
First Republic Bank, the 14th-largest US commercial bank, has experienced a $100bn fall in deposits and a one-third drop in net income in Q1 2023. Following the failures of Silicon Valley Bank and Signature Bank and a subsequent global banking panic, First Republic's uninsured depositors have lost confidence in the bank's stability. The bank is now making cutbacks to survive, with a "significant" reduction in executive pay and a workforce reduction by as much as a quarter by mid-year. First. With a "significant" reduction in executive pay and a workforce reduction by as much as a quarter by mid-year. First Republic has pledged assets as collateral to borrow from others and said it is working to restructure its balance sheet and reduce its expenses and short-term borrowings.
Reference:
Colin Barr. (Apirl 24, 2023). What’s Going On With First Republic Bank? The Wall Street Journal.
This article is reference from:
https://www.wsj.com/articles/first-republic-bank-stock-rescue-what-to-know-a22a3d?mod=series_bankmeltdown
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