First Republic reported earnings this past Monday and it was revealed that $100B or 57% of its bank deposits have fled since the SVB collapse. The market was apparently shocked and its stock has been plummeting since the report. FRC 0.00 price was $14.26 at last Friday’s close but just a week later, it closed at $3.51 today, a 75% fall. It was labeled as a zombie bank by a few experts. The main issue is that the bank’s long duration assets generate a very low yield while they have to pay high interest rates for the loans they borrowed to fill the $100B hole. Assuming they are paying 5% on the $100B of assets instead of 0% like before, they have to absorb about $5B of extra expenses per year while only generating about $2B of pre-tax income annually. Losing $3B a year is simply not sustainable for First Republic as they have to maintain various banking ratios to stay compliant. They are also not in a position to underwrite new loans as they really need to reduce the size of their balance sheet given the new smaller deposit base. If a bank can no longer underwrite new credit, it basically becomes a zombie, a shell of its former self. But it’s hard to continue to operate in this form.
There are reasonable proposals on how First Republic can be privately rescued. But so far, no one wants to be the hero. First Republic has been known as the bank for the wealthy with excellent high-touch service and amazingly low mortgage rates. Everyone wants the bank to survive but the path to survival appears to be elusive. According to WSJ, First Republic current’ market-to -market losses are about $20B but they only had $17B of equity on their balance sheet as of 12/31/2022. It is very likely that the Fed will take over First Republic Bank over the weekend. In that case, I believe the depositors will again be made whole but equity and corporate bond holders are going to be wiped out. In any case, we are likely to see more banking chaos ahead as more bank deposits flee to safe places like short-term treasuries or government money market funds.