First Republic Bank worked overtime on Sunday to reassure customers it was safe to operate after the collapse of Silicon Valley Bank last week sparked fears of contagion in the banking sector.
But its stock plunged nearly 50% ahead of Monday’s open despite attempts to reassure customers of the strength of its business.
Early Sunday evening, First Republic leaders issued a statement in which they highlighted the “continued strength” of its capital, liquidity and operations. But that was not all.
Shortly after the publication of the First Republic, the Federal Reserve unveiled a new Bank Term Funding Program (BTFP), which would allow banks to better manage their liquidity. In addition to BTFP, the Fed also said it was easing the terms of its discount window, which allows lenders to take out short-term borrowing to meet their liquidity needs.
Apparently, the Fed’s conditions were too good to ignore. Later on Sunday, First Republic (ticker: FRC) said it “has further strengthened and diversified its financial position” thanks to additional liquidity from JPMorgan Chase (JPM) and the Fed. The First Republic’s total free and idle liquidity now exceeds $70 billion, the bank said. That’s up from the $60 billion disclosed earlier on Sunday. The bank added that this new amount does not include financing it is eligible for under the BTFP.
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“First Republic’s capital and liquidity positions are very strong, and its capital remains well above the regulatory threshold for well-capitalized banks,” Chairman Jim Herbert and CEO Mike Roffler wrote Sunday evening.
At the end of 2022, the First Republic had $176.4 billion in deposits, according to regulatory filings.
But bank stocks, in general, failed to launch a rebound in Monday’s pre-market, even after the US government and regulators stepped in to try to head off a potential crisis after the sudden collapse of Silicon Valley Bank.
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Shares of the San Francisco-based bank sagged last week amid the Silicon Valley Bank meltdown, with First Republic shares cratering as much as 50% in Friday’s trading session before ending the day down 15%.
On Monday, regional banks were again hardest hit, with PacWest Bancorp (PACW) down 25% and Western Alliance Bancorp (WAL) down 18%. The pair is down 55% and 35% respectively in the past week.
Shares of Bank of America (BAC), among the most active in early trading, fell 3.8%, after falling 11% last week. Brokerage firm Charles Schwab (SCHW) posted a 1.8% decline following last week’s 24% decline.
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Although First Republic doesn’t cater to the struggling start-up and venture capital industry as much as Silicon Valley Bank, investors are concerned that its concentrated and well-heeled deposit base may seek to displace their savings into higher yielding products. , thereby eroding a low-cost source of funding for the bank.
Jon G. Arfstrom, director of research at RBC Capital Markets, called the announcement “positive news for the First Republic,” especially in light of announcements made Sunday by federal regulators to support uninsured depositors in the Silicon Valley Bank and Signature Bank.
“Broadly, regulatory and treasury decisions to tie up depositors at recently failed banks and provide qualified institutions with access to secured lines of credit should provide near-term confidence in funding conditions. and liquidity for FRC and the industry,” Arfstrom wrote.
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At the start of the weekend, analysts acknowledged the challenges facing the First Republic, but pointed out that comparisons with Silicon Valley Bank were overstated.
“We believe FRC is not SIVB,” UBS analyst Erika Najarian wrote in a note Friday in which she maintained her buy rating on the stock.
In February 2022 — the most recent data — venture capital and private equity deposits made up 8% of First Republic’s business, while they made up 52% of Silicon Valley Bank’s deposit base, wrote Najaryan. Additionally, First Republic’s available-for-sale portfolio represented 1.7% of the bank’s earning assets compared to 14% at Silicon Valley Bank.
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Still, Najarian acknowledged that although First Republic is better positioned than Silicon Valley Bank, it is still likely to face pressure from narrowing net interest margin (NIM) in this rising rate climate.
“We emphasize that NIM pinches are not the same as business model/strategic/balance sheet management issues,” Najarian wrote.
While the First Republic may not have an easy path to follow, Wall Street hopes the cool heads will prevail.
Write to Carleton English at carleton.english@dowjones.com