Shares of First Republic plunged nearly 13% just after the market opened on Monday after S&P Global again downgraded the regional bank’s credit rating and warned that a $30 billion bailout would not be enough.
Rating agency S&P downgraded the bank’s long-term debt to junk status from BB+ to B+ on Sunday. It’s the second time S&P has downgraded the bank’s credit rating in less than a week, after cutting it from A- to BB+ on Wednesday.
The stock (ticker: FRC) closed up 33% on Friday despite pledges of $30 billion from a consortium of 11 U.S. banks including JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C). deposit in the bank for at least 120 days. The intervention did not help the stock. S&P said it should ease short-term liquidity pressures but might not end the bank’s problems.
“It may not resolve the significant business, liquidity, funding and profitability challenges that we think the bank is now likely to face,” said Nicholas Wetzel, credit analyst at S&P Global.
He added that the bank was “likely under severe liquidity stress with significant deposit outflows over the past week.” He cited the big banks’ cash injections, First Republic’s disclosure that its daily borrowings from the Federal Reserve ranged from $20 billion to $109 billion March 10-15, and the suspension of its dividend.
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S&P said it gave First Republic a CreditWatch negative status, suggesting its rating could be lowered further if the bank doesn’t start demonstrating progress on stabilizing deposits.
It wasn’t all doom and gloom for other US regional banks, which were hit hard last week. PacWest Bancorp (PACW) shares were up 22%. New York Community Bancorp (NYCB) shares rose 34% after its subsidiary Flagstar Bank agreed to buy most of Signature Bank’s businesses.
In Europe, bank stocks fell after UBS (UBS) agreed to buy rival Credit Suisse (CS) in what UBS President Colm Kelleher described as an “emergency rescue”. Credit Suisse shares plunged nearly 50% as the market assessed the deal, while UBS shares initially fell and are up 8%.
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In a note on Monday, analysts at Hovde Group said that while banking risks still exist, their base case is that “the worst is over”.
“There could still be issues depending on what uncertain actions the Fed and regulators take, but we still believe the ‘contagion’ will be limited to a stronger increase in funding cost pressures, which translates to the NII (Net Interest Income) and potential impact of the recession,” they added.
However, they still believe that 2023 and 2024 earnings estimates for the banking sector will need to be cut by 10% to 15% at best.
Write to Callum Keown at [email protected]