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The Street
The Street
Business
Ellen Chang

First Republic: Finding a Buyer Could Mean a Breakup of Assets

Selling the assets of First Republic Bank could be challenging as buyers may not want its portfolio of loans, but the bank needs to raise cash soon.

The bank, which received a rescue from a coalition of 11 U.S. banks that contributed $30 billion in deposits to shore up its liquidity, could either break up up its portfolio of loans and deposits or attempt to raise more capital.

DON'T MISS: S&P Stuns First Republic Bank with More Bad News

The San Francisco-based bank is seeking new capital and hired JP Morgan Chase, sources told Reuters.

Investors are wary of First Republic's unrealized mark-to-market losses from its loans and investments, which are impeding an infusion of new capital, the article said.

The rescue from the big banks that was orchestrated by regulators is meant to be a temporary fix since the banks agreed to keep the $30 billion at First Republic for at least 120 days. The banks will receive the same daily interest as current First Republic clients.

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First Republic's options are limited - the bank's loans could be sold to another bank or to private equity companies, raise additional capital from an investor or sell the bank outright, Reuters reported.

The bank's priority is raising more money to add additional liquidity, Reuters reported.

First Republic remains at the center of the lack of crisis in confidence rocking the banking sector since the sudden collapse of Silicon Valley Bank after bad bets on interest rates.

The bank has a portfolio of municipal bonds and presents a similar profile to SVB. Investors are not convinced that First Republic will not be the next bank to fall.

First Republic Stock Remains Volatile

Shareholders have mixed feelings about the prospects of the bank. The stock tanked by 47% on March 20, but rebounded on Tuesday by 30% only to decline by 15% in after-markets trading. The stock has fallen by 90.75% during the past year.

The bank hired investment bank Lazard to determine its options and McKinsey, a consulting firm, to map out its future, sources told the Wall Street Journal.

The bank issued “a message to our clients” as investors punished the stock price by fleeing.

“Our commitment to client service is unchanged, and we remain well-positioned to continue to manage deposit activity,” the statement said.  “Today, as every day, we are processing transactions, opening accounts, funding loans, answering questions, and serving clients’ overall banking and wealth management needs.”

Ratings agency S&P downgraded the regional bank for the second time in a week. The bank's credit rating was lowered to B+ from BB+, and it remains on CreditWatch negative, meaning S&P could lower the rating further if the bank is "unable to demonstrate some progress in stabilizing deposits and recovering the franchise value that, in our view, has likely eroded," the agency said.

At S&P, B+ means that the company is "more vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments."

The volatility in the stock price is a sign that investors believe that First Republic will emerge as a bank with fewer assets and investments. 

"Repeating a point I have made before, First Republic's stock price decline is probably not a sign of the apocalypse, but instead a rational repricing of the stock to reflect its base case profitability as a much smaller and simpler bank," wrote Todd Baker, a senior fellow at the Richman Center for Business, Law and Public Policy at Columbia University in New York and managing principal at Broadmoor Consulting, in a LinkedIn post. 

The bank had $212.6 billion in assets as of Dec. 31, 2022 while its 2022 revenue was $5.9 billion, up 16.5% from 2021, recording 2022 net income of $1.7 billion, up 12.7%.

First Republic's asset size will shrink massively, he said.

"My guess is that when all is said and done, it may emerge as a $50 billion asset bank with a 1% return on asset (ROA), generating net income of $500 million annually," Baker said. "Put a 10x bank multiple on that and you come up with pretty close to the current market cap and stock price."

The value of the bank could still be in flux for awhile, he said.

"This still may be overvaluing the stock, as it is likely that a dilutive stock issuance will be necessary to recap the company and it will take time to unwind the expensive liquidity once depositors return," Baker said.

Shareholders are in for a bumpy ride, but First Republic's prospects are positive since "customers love this bank, as they did Silicon Valley Bank, so it has a good chance of a revival," he said.

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