First Republic Bank, a major American bank, is facing an uncertain future after a significant drop in its stock price and a loss of $100 billion in customer deposits in the first quarter of 2023. The bank’s troubles began when analysts downgraded their ratings due to the risks of deposit outflows leading to increased funding costs, observing that the bank’s funding and liquidity profile has changed and represents a “weakest link.”[0] On October 14, 2022, First Republic released its third-quarter financial results, reporting a slowdown in the company’s net interest income growth to 20.6% year-over-year and a net interest margin decrease to 2.71%.[0] The company explained that the decrease was due to “average funding costs increasing more rapidly than the offsetting increase in the average yields on interest-earning assets.”
The situation worsened when Silicon Valley Bank collapsed on March 10, 2023, triggering a flight from several large regionals, and First Republic investors began to question the bank’s ability to withstand the interest rate environment and remain solvent.[1] In response, First Republic’s stock price fell by 72.9% in just three days.[0]
At the end of 2022, First Republic had a ratio of 111% for loans and long-term investments to deposits, meaning it has loaned and invested more money than it has in deposits and is subjecting itself to liquidity risk.[2] Additionally, a large percentage of First Republic’s deposits were not insured by the FDIC, making it especially susceptible to deposit flight.[3] While the government will cover uninsured deposits over the $250,000 FDIC limit, there is no upside to leaving money in the bank.
First Republic lost more than $100 billion of customer deposits in the first quarter, leaving it with $55 billion of insured deposits, $20 billion of uninsured deposits, and $30 billion of those term deposits from other big banks.[4] The bank is left with esoteric and illiquid assets, such as jumbo and super jumbo mortgages, while its deposits are largely gone.[5]
The bank’s management refused to take any questions from analysts after their earnings call, likely advised by their lawyers to do so.[5] However, this move only served to further damage the bank’s reputation and erode investor confidence.
First Republic’s fate is uncertain, with some experts predicting that it may be closed in the next few weeks.[6] While uninsured depositors will likely be paid in full, the common equity is expected to go to zero, barring some sort of political takeunder by a competitor. This situation is not currently a threat to the overall financial system, but it is an example of a large bank using too much leverage in a zero-rate world and flying too close to the sun.[5]
In conclusion, First Republic Bank is facing a precarious future due to its high loan-to-deposit ratio, uninsured deposits, and loss of customer deposits. The bank’s management’s refusal to take questions from analysts has only added to the uncertainty and eroded investor confidence. While uninsured depositors will likely be paid in full, the bank’s common equity is expected to go to zero, barring a political takeunder by a competitor. As the situation evolves, it remains to be seen what the future holds for First Republic Bank.
0. “Deadline Reminder: Law Offices of Howard G. Smith Reminds Investors of Looming Deadline in the Class Acti” Benzinga, 28 Apr. 2023, https://www.benzinga.com/pressreleases/23/04/b32097552/deadline-reminder-law-offices-of-howard-g-smith-reminds-investors-of-looming-deadline-in-the-class
1. “Pre-Farewell to First Republic” The American Prospect, 28 Apr. 2023, https://prospect.org/economy/2023-04-28-pre-farewell-first-republic/
2. “Here’s what we know about First Republic Bank” CNN, 27 Apr. 2023, https://www.cnn.com/2023/04/27/investing/premarket-stocks-trading/index.html
3. “First Republic teeters on the edge — again” CNN, 28 Apr. 2023, https://www.cnn.com/2023/04/28/business/first-republic-bank-stock-plunge/index.html
4. “First Republic Bank shows how not to bolster confidence” Moneycontrol, 27 Apr. 2023, https://www.moneycontrol.com/news/opinion/first-republic-bank-shows-how-not-to-bolster-confidence-10484391.html
5. “First Republic Stock Is Likely The Next Shoe To Drop (NYSE:FRC)” Seeking Alpha, 27 Apr. 2023, https://seekingalpha.com/article/4597335-first-republic-likely-next-shoe-to-drop
6. “How First Republic Bank’s strategy of low-rate mortgages backfired” Business Insider, 25 Apr. 2023, https://www.businessinsider.com/why-first-republic-bank-in-trouble-mortgages-backfired-rising-rates-2023-4