March 21 (Portal) – Efforts by First Republic Bank (FRC.N) to secure a capital injection continued unsuccessfully on Tuesday as the troubled regional lender began planning the possibility that it might expand its size downsize or receive government support.
Big banks and private equity firms have so far refused to offer First Republic the requested capital injection for fear of triggering losses on the bank’s loan book and investment portfolio as interest rates rise.
On Tuesday, Portal reported that First Republic is considering how to downsize and sell parts of its business, including part of its loan book, to raise cash and cut costs.
That could help the bank manage its negative book value — the gap between its liabilities and its assets — which analysts and investors are estimating at between $9.4 billion and $13.5 billion.
Bloomberg News reported that US officials and Wall Street executives eager to help First Republic were exploring the possibility of government support that would help overcome the bank’s unrealized loss problem.
The government could play a role in taking out assets that have eroded the First Republic’s balance sheet, Bloomberg reported on Tuesday, citing people with knowledge of the discussions.
First Republic declined to comment. In a message to customers published on its website on Tuesday, the bank said it was “well positioned to continue to manage deposit-taking activity.”
Shares of First Republic plunged 9% in extended trading Tuesday night. Some investors are associating potential government intervention with the regulatory takeovers that followed this month’s failures of Silicon Valley Bank and Signature Bank, wiping out their shareholders.
“People just get nervous that if the government steps in, shareholders will be left with nothing,” said Dennis Dick, a trader at Triple D Trading in Ontario, Canada.
The new scenarios for First Republic come as chief executives from major banks gathered in Washington, DC for a two-day scheduled meeting beginning Tuesday, sources familiar with the matter said.
The quarterly meeting of the Financial Services Forum was attended by CEOs of JPMorgan Chase & Co (JPM.N), Jamie Dimon, and Bank of America Corp (BAC.N), Brian Moynihan, the country’s two largest lenders, according to the Sources.
First Republic shares are up as much as 60% on Tuesday before closing 30%, but even so, First Republic stock is down over 80% over the past two weeks. Its market value was $3 billion compared to $27 billion in early February.
JPMorgan is advising First Republic on its ability to raise capital from investors, a source familiar with the situation previously said.
The banks want to work out details on what needs to be done for First Republic within the next 24 hours, another source said.
Eleven lenders, including the eight members of the Financial Services Forum, tossed First Republic a lifeline totaling $30 billion in deposits last week.
Collapse of the First Republic Bank stock markets
The US banking system is showing signs of stabilizing, but further steps to protect bank deposits may be warranted if deposits hit smaller institutions, US Treasury Secretary Janet Yellen said.
In a sign of easing nervousness, traders are now expecting the Federal Reserve to hike interest rates on Wednesday at the conclusion of its two-day policy meeting. A week ago, fearing a deepening financial crisis, traders bet that the Fed would halt its fight against inflation.
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The S&P 500 (.SPSY) financial index rose 2.5% on Tuesday, its biggest one-day gain since November.
“There are a number of factors driving (financial) stocks higher, including Yellen’s comments. We have the Fed meeting tomorrow, so there’s some anticipation for that,” said Macrae Sykes, portfolio manager of the Gabelli Financial Services Opportunities ETF (GABF). .P).
VOLATILE STOCKS
The recent sell-off in banking stocks, sparked by the collapse of Silicon Valley Bank and Credit Suisse (CSGN.S), which was bailed out by UBS (UBSG.S) on Sunday, has some investors looking for bargains.
“Shares are cheaper today than they were during the pandemic and unless you buy banks here, we don’t know when you will,” Baird analysts said in a note to clients. The market is currently pricing in a permanent reduction in asset returns of up to 50%, it said, calling it “beyond silly.”
Other investors remained skeptical about First Republic’s stability.
“We believe that First Republic remains in crisis,” said Jason Benowitz, senior portfolio manager at CI Roosevelt.
Reporting by David French, Nupur Anand, Lananh Nguyen, Tatiana Bautzer and Saeed Azhar in New York, Medha Singh in Bengaluru and Noel Randewich in Oakland, California; additional reporting from Shubham Batra in Bengaluru and from Sinead Carew and Lance Tupper in New York; Edited by Greg Roumeliotis, Anna Driver, Leslie Adler and Lincoln Feast.
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