The rating agency has just downgraded the regional bank for the second time in a week.
The pressure continues to mount around First Republic Bank.
The San Francisco-based bank is at the center of the confidence crisis currently rocking the banking sector since the sudden collapse of Silicon Valley Bank following bad interest rate bets.
For investors concerned about what they don’t know, First Republic Bank, which has a portfolio of municipal bonds, presents a similar profile to SVB. Therefore, they are convinced that it will be the next bank to fail.
Regulators tried to reassure investors by orchestrating a bailout plan led by the big banks. On March 16, a coalition of 11 US banks provided $30 billion in deposits to First Republic Bank to bolster its liquidity.
rescue plan
The major banks (Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup) participated in the bailout plan, each contributing $5 billion. Goldman Sachs and Morgan Stanley each contributed $2.5 billion.
“This show of support from a group of large banks is very welcome and demonstrates the resiliency of the banking system,” the Treasury Department said in a statement, while the coalition of lenders said “America’s largest banks are united with all the banks to support our economy and everyone around us”.
This show of solidarity failed to stabilize First Republic Bank, whose share price has fallen by 80% since SVB’s bankruptcy.
The slide should continue as S&P Global Ratings has just downgraded First Republic Bank for the second time in a week as it believes the bailout will not solve the liquidity problems the firm will face.
The bank’s credit rating was lowered to B+ from BB+, and remains CreditWatch negative, meaning S&P could lower the rating further if the bank cannot demonstrate any progress in stabilizing deposits and recovering asset value. franchise that, in our opinion, probably eroded
S&P is not convinced
At S&P, B+ means that the company is “most vulnerable to adverse business, financial and economic conditions, but currently has the ability to meet financial commitments.”
The situation can deteriorate rapidly.
“The $30 billion in deposits that First Republic has reported it will receive from 11 large US banks should alleviate near-term liquidity pressures,” the ratings agency explained in a March 19 research note. “But it may not solve the substantial business, liquidity, financing and profitability challenges that we believe the bank is likely to face now.”
S&P said First Republic Bank is facing outflows from its wealthy clients, whose deposits are uninsured, meaning more than $250,000, and as a result, the ratings agency believes the company faces “substantial long-term challenges.”
“Following Thursday’s $30 billion uninsured deposit from the country’s 11 largest banks, along with cash on hand, First Republic Bank is well positioned to manage short-term deposit activity,” a spokesperson said. of First Republic Bank in an emailed statement. “This support reflects the confidence in First Republic and its ability to continue to provide exceptional and unwavering service to its clients and communities.”
S&P indicates that there are only two scenarios that could lead it to not downgrade First Republic Bank any further.
The bank must make “significant progress in rebuilding its deposit base with consumer deposits and traditional core businesses.”
On March 15, S&P had already downgraded First Republic Bank’s rating, also followed by Fitch Ratings.
The two credit rating companies are concerned about the number of First Republic Bank’s uninsured deposits, those accounts that exceed the FDIC’s $250,000 limit. The holders of these accounts could become concerned and decide to withdraw their money, creating a bank run.
“The bank’s trading position will take a hit following volatile changes in its share price and increased media attention around deposit volatility,” S&P said at the time. “Its business stability has weakened as market perception of its solvency has declined.”
“We believe the risk of outflow of deposits is high in the First Republic, despite the actions of federal regulators.”
Fitch said the bank has a very high concentration of wealthy clients, which is a “weakness” because their deposits are not guaranteed. If those wealthy customers panic, it’s unclear if First Republic can respond to their withdrawal requests in one fell swoop.
“This not only generates a high proportion of uninsured deposits as a percentage of total deposits, but also results in deposits that may be less rigid in times of crisis or severe stress,” Fitch explained.
As of December 31, 2022, First Republic Bank had $212.6 billion in assets. Its 2022 revenue was $5.9 billion, up 16.5% from 2021, while the bank posted 2022 net income of $1.7 billion, up 12.7%.
Founded in 1985, the bank offers private personal banking, private business banking, and private wealth management. It is present in eight states: California, Oregon, Massachusetts, Florida, Connecticut, New York, Wyoming, and Washington.
FRC has said its client base is more diverse than Silicon Valley Bank’s, which relied heavily on startups and venture capital firms.
