First Republic Bank absorbed debt rating downgrades from three major bond research firms on Wednesday as concerns grew that it would suffer further deposit flight that would hurt already modest profitability. S&P Global Ratings on Wednesday downgraded its issuer credit rating on First Republic Bank by four notches to BB-plus from A-minus, placing it in speculative grade or ‘junk’ status. The move comes hours after S&P put the bank on review for downgrade late Tuesday. First Republic FRC, -19.86% stock fell 18% to $32.38, putting it near an 11-year low hit at $31.21 during a major bank selloff on Monday. Read now: Silicon Valley Bank: Here’s What Led to Its Collapse “We believe that the risk of deposit outflows at First Republic Bank is high despite the bank actively increasing its lending availability to reduce the risk associated with the actions of federal banking regulators and bank failures. last week,” S&P said in a statement. The Federal Reserve’s liquidity measures announced on Sunday are positive, including the creation of the Bank Term Funding Program and the easing of terms offered through the discount window. The program offers loans of up to one year to banks that Pledges eligible securities. Also read: Elizabeth Warren proposes nixing 2018 rollback of banking rules: ‘We now have evidence of what happens when you get relaxed.’ “Still, if deposit outflows continue, we expect First Republic to rely on its more expensive wholesale borrowings. This will strain its balance sheet and hurt its modest profitability,” S&P_ said. First Republic’s deposit base is more concentrated than that of most large US regional banks and poses higher funding risks in the current environment. As of Dec. 31, the bank had About $176.4 billion were deposits, of which 63% were commercial. Read now: Calling the Silicon Valley bank failure a ‘black eye’ for bank regulators, Congress said “We believe that the portion of the Federal Deposit Insurance Corp.’s insurance limit above $250,000–about 68% of the total, or $119.5 billion–is most vulnerable to withdrawal. Yet. the bank’s historically excellent depositor loyalty,” the agency said. “According to the bank, its number of deposit accounts is about one-fifth that of the average U.S. bank with $100 billion to $250 billion in assets, highlighting its average account size.” First Republic It said over the weekend that it has more than $70 billion in contingent borrowing available to meet liquidity needs, including the ability to borrow from the Fed and credit from JP Morgan JPM, -5.01% . But S&P expects that near-term liquidity Will use bulk funding to address the pressure, straining its balance sheet. Plus:SEC Chief Gensler has promised an investigation into the bank’s failures, saying, “Funding metrics may weaken relative to peers, and we expect the ratio of loans to deposits — already high at 95% by year-end 2022 — to exceed 100%. ,” S&P said. Statement and that’s not all. Earnings pressure is likely to intensify, as reliance on wholesale borrowing is more expensive than deposits. The bank makes more of its profit from net interest income than fee income, and its net interest margin in the fourth quarter narrowed by 26 basis points from the previous quarter. Fourth-quarter return on average assets was just 0.74% and return on equity was just 10.1%. “Finally, we feel that the business position of First Republic is weak following the events of the past week,” the statement said. “We believe that the bank’s operating condition will be over-exposed to media attention surrounding volatile swings in its share price and deposit volatility. We feel that its business stability has weakened as market perceptions of its creditworthiness have gone down.” A downgrade of one notch typically equates to about 25 basis points of additional borrowing costs for the company. However, the four-notch downgrade signals more potential problems for the company and could result in stricter loan requirements such as giving up equity in the business to the lender, said a debt analyst who asked not to be named. Also read: Shares of regional and major banks are volatile amid growing fears of a banking crisis
