Why the rescue of the First Republic didn’t end the banking turmoil

JPMorgan Chase

and other big banks stepped in to shore up this week

Bank of the First Republic

of $30 billion, but their efforts have done little to restore Wall Street confidence in regional lenders.

The First Republic bailout, which involves many of America’s largest banks, including

Bank of America



(C) and JPMorgan Chase (JPM) initially brought some relief to the stock. A group of 11 lenders are putting $30 billion into the bank for at least 120 days to show their confidence in the wake of bank runs that led to the recent Silicon Valley Bank and Signature Bank collapses.

The stock closed 10% higher, but the rally was short-lived. After the market closed, First Republic suspended its dividend and announced that it had recently borrowed from the Federal Reserve’s discount window, a move often associated with financial hardship.

“The significance of the changes in FRC’s balance sheet in just one week is overwhelming in our view and together with the suspension of the common stock dividend paints a very grim outlook for the company and shareholders,” Christopher McGratty, analyst at Keefe, Bruyette & Woods, wrote on Friday.

That was not the intent of Thursday’s rescue plan, which was also included

Wells Fargo


Goldman Sachs




Bank of New York Mellon


PNC Financial Services Group

(PNC), State Road,

Trustworthy finances

(TFC) and

U.S. Bancorp


The move reflects their “confidence in the country’s banking system,” the banks said in a joint statement. “America’s largest banks stand with all banks to support our economy and everyone around us,” they added.

Wall Street is dubious. Analysts appear confident that the $30 billion in deposits will buy First Republic time before it can be sold, but the sale wouldn’t be the kind investors would be hailing.

Analysts at Wedbush downgraded First Republic stock to Neutral from Outperform Friday, with a price target of $5. They said that in an emergency scenario, a sale of the bank would result in minimal residual value for shareholders, noting that First Republic’s tangible book value as of December 31 was minus $73 per share when measured at fair value was rated. That equates to a $13.5 billion capital hole for a potential buyer, they said.

“A sale of FRC to a larger company should be beneficial to the banking system as a whole and help reduce fears of contagion,” Wedbush said. “However, given the fair value of the marks embedded in both the loan and securities portfolios, we find it difficult to develop a realistic scenario in which there is residual value for FRC common stock shareholders.”

All of that also assumes that First Republic could easily find a buyer. The bank has an enviable list of wealth management clients, but larger banks, perhaps First Republic’s natural acquirers, might be concerned about buying a troubled institution. During the 2008-09 financial crisis, JPMorgan and Bank of America stepped in to bail out firms like Bear Stearns, Washington Mutual and Countrywide Financial, only to find themselves saddled with billions of dollars in legal liabilities, a factor that has stalled could be potential acquirers of First Republic.

Silicon Valley Bank and Signature Bank, which collapsed last week, 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


wrote Friday.

Others on Wall Street cited the peculiarity of the First Republic bailout, with The Boock Report’s Peter Boockvar writing, “What a strange way to bail out a bank.”

“Imagine Janet Yellen calling Walmart, Costcogoal and Amazon and encouraged them to buy stuff every month from a different retailer whose business was faltering to keep them afloat,” Boockvar wrote, noting that the minimum deposit term is 120 days.

This allows the bank to “fight another day” according to Evercore ISI analysts, but amounts to a “temporary solution”.

Wall Street is trying to assess how the regional banks will fare. Even before Thursday’s actions, Wall Street was anticipating that smaller banks would soon face tighter regulations and higher capital requirements, both of which would hurt the sector’s earnings profile.

“These potential tightening regulations will weigh on normalized returns and lead to more consolidation over the longer term. Additionally, we are more cautious on balance sheet growth and credit availability as banks adjust balance sheets to accommodate potential new requirements,” KBW analyst David Konrad wrote on Wednesday.

Indeed, Thursday’s First Republic news fueled new fears on Wall Street.

Activist investor Bill Ackman said the intervention only helped increase the risk that banks’ strains would hit more lenders. “The result is that First Republic Bank’s default risk is now spread across our largest banks,” he said said in a tweet late Thursday. “Disseminating the risk of financial contagion to create false confidence in the 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 bailout of the First Republic “may actually have accelerated deposit outflows from other regional banks that may not get help when needed.”

The BMO team is looking for an all clear signal that would indicate funding stability across the banking sector which could lead to a buying opportunity but remains cautious.

“While the ‘all clear’ has been given, we are concerned about the solvency implications of changes in security capitalization that result directly from this interest rate driven liquidity crisis. All of this before the credit cycle has even started. Bank stock performance may remain subdued for some time,” wrote the BMO team.

The American Depositary Shares of


(CS) – another bank under pressure – fell more than 5.3% by midday. It rose almost 20% in previous sessions after the bank announced it would borrow up to 50 billion Swiss francs ($54 billion) from the Swiss central bank.

The stock was down 24% on Wednesday after its largest shareholder ruled out investing more in the bank. It remains down 32% since early March.

Despite concerns about the health of banks spreading to Europe, the European Central Bank hiked interest rates by half a percentage point on Thursday, sticking to the plan it outlined last month.

The ECB is the first major central bank to make an interest rate decision since the turmoil sparked by the collapse of the Silicon Valley bank. The Federal Reserve’s next decision will be made on March 22, with the Bank of England the day after.

Write to Callum Keown at callum.keown@barrons.com

Source : www.barrons.com

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