First Republic shares dive nearly 50% as US bank jitters mount

NEW YORK - First Republic Bank’s stock plunged nearly 50 per cent on Tuesday, a day after it released results showing just how perilous the US lender’s future had become since mid-March following the

failure of Silicon Valley Bank and Signature Bank.

The stock’s free fall set off a series of volatility-induced trading halts by the New York Stock Exchange.

Amid the biggest turmoil to hit the banking sector since 2008, the San Francisco-based bank now faces tough options to turn around its business with the creation of a “bad bank” or asset sales possibilities, a source familiar with the matter said, after the lender showed the extent of deposit flight during March’s banking crisis.

On Monday, after the close of regular stock trading, First Republic said its clients pulled US$102 billion (S$136.5 billion) in deposits in the first quarter – well over half the US$176 billion it held at the end of 2022.

First Republic is considered the most vulnerable United States regional bank after

the banking crisis in March.

What happens to it could also affect investors’ confidence in other regional banks and the financial system more broadly.

A ripple effect was felt among other banks and the broader market.

Regional bank PacWest Bancorp fell 8 per cent, Western Alliance Bancorporation 6 per cent, Zions Bancorp 4 per cent and brokerage Charles Schwab was down 3 per cent. Large banks were also hit, with JP Morgan down 1.8 per cent.

The KBW Regional Banking Index dropped 3.8 per cent, the broader S&P 500 bank index fell 2.6 per cent and broader markets showed concern with US stocks lower and US Treasury yields falling.

First Republic said on Monday it was “pursuing strategic options” to quickly strengthen the bank, without providing details.

The lender was studying all options, a person familiar with the matter said on Monday.

The source said the bank wanted the US government to help by convening parties that could buoy First Republic‘s fortunes, including private equity firms and big lenders.

Options include an asset sale of up to US$100 billion, a source familiar with the situation said.

Bloomberg News earlier reported the chance of asset sales and said buyers might receive incentives such as warrants or preferred equity.

Mr David Chiaverini, analyst at brokerage firm Wedbush Securities, said that if First Republic was willing to hand out preferred equity in exchange for selling loans above market value then “it will allow them in a way to sidestep from realising the losses while at the same time help to capitalise the bank”.

The bad bank possibility, earlier reported by CNBC, is a crisis-type method of isolating financial assets that have problems.

Mr Chiaverini said such a scenario would be a challenge as the bank’s loans and securities are nearly all performing.

“So it’s tough to even describe it as good asset and bad asset,” Mr Chiaverini said. “And that is why this scenario looks challenging.”

Wall Street analysts expect challenges to extend through 2023 after the two US bank failures in March created a liquidity crunch at a slew of regional lenders.

Analysts at Wells Fargo said the reported deposit outflows were much worse than Wall Street estimates and at a “level that could prove very hard to come back from”.

Deposit flight has been at the centre of investor concerns as clients move capital towards money market funds that bring in higher returns or larger “too-big-to-fail” institutions.

The sector-wide upheaval has led to the KBW Regional Banking Index contracting nearly 22 per cent in 2023, while First Republic shares dived roughly 87 per cent in the fallout. REUTERS, NYTIMES