(Bloomberg) – First Republic Bank warded off a possible collapse after a group of larger financial firms agreed to park a total of $30 billion in deposits with the lender. But the cash injection is only a short-term solution, and investors are dissatisfied.
The San Francisco-based company still needs to move quickly to find a way to remain independent or strike a deal for an acquisition. The act with the 11 lenders including Bank of America Corp., JPMorgan Chase & Co. Citigroup Inc. and Wells Fargo & Co. includes deposits with an initial maturity of 120 days.
“The market may interpret that the $30 billion in new deposits prevented a depositor run, but it didn’t add new equity to the bank,” Arthur Wilmarth, professor emeritus at George Washington University Law School, said in an interview. “Shareholders know they are at risk.”
Shares of First Republic plummeted 27% on Friday morning and were down 26% to $25.34 as of 12:44 p.m. in New York. They’re down 79% this year.
The price drop on Friday underlines the tense situation of US politicians. If the bank bailout ultimately succeeds in easing concerns about the sector, Washington will have avoided a violent policy backlash that would surely have followed any government intervention. If that doesn’t address broader concerns, officials will face a difficult set of decisions about next steps.
Adding to the market’s concerns is that First Republic tapped as much as $109 billion of Federal Reserve liquidity lines in the days leading up to its bailout from the big banks, said Arnold Kakuda, banking analyst at Bloomberg Intelligence. First Republic was Exploring strategic optionsincluding a sale, Bloomberg News reported earlier this week.
“So these $30 billion in deposits from big banks may just be buying time, but concerns remain,” Kakuda said.
A bank representative declined to comment.
Analysts have been forced to extrapolate from data provided by First Republic to determine exactly how its financial position has changed over the past few days. An estimate by Jefferies Financial Group Inc. puts potential deposit outflows at $89 billion. The bank said in a statement late Thursday that insured deposits “remained stable” between the close of business March 8 and March 15.
“Daily deposit outflows have slowed significantly,” First Republic said. The bank had about $119 billion in uninsured deposits at the end of last year, according to a December filing, a little more than 67% of its total deposits of $176 billion.
Meanwhile, analysts have trimmed their recommendations for the bank. Wedbush analyst David Chiaverini cut First Republic to neutral and said it was difficult to “create a realistic scenario where, in the event of a sale, there would be residual value for FRC common stockholders.”
Morningstar Inc. strategist Eric Compton said while the $30 billion in deposits may appear positive on the surface, they also confirm some of people’s worst fears about the bank’s financial health.
“Prior to this event, we were not sure if First Republic had actually experienced a real run on the bank or if the bank might be able to keep its deposit base relatively intact,” Compton wrote Friday. “First Republic’s disclosures regarding this recent cash injection remove any doubt that a significant outflow of deposits took place.”
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Analysts at Evercore Inc., led by John Pancari, said in a research note late Thursday that “the deposit infusion allows the bank to struggle for another day” but that it “is likely to be a temporary fix — especially given the 120 mentioned.” -day window”.
First Republic specializes in private banking and has built a wealth management franchise with approximately $271 billion in assets. Those following the company’s troubles say it helps make it a potentially attractive acquisition target.
“They were never a traditional bank,” said John Allison, the former head of BB&T Corp., a predecessor of Truist Financial Corp. “They are in a very good market and have a very good market share. They were after the high-yield deposits. The downside is that they are not insured.”
–Assisted by Maxwell Zeff.