First Republic sinks bank stocks as investors shrug off $30 billion infusion

By Steve Gelsi

Effort led by Fed chief Jerome Powell, Treasury's Janet Yellen and JPMorgan CEO Jamie Dimon backstops bank -- but analysts say the damage has already been done

First Republic Bank's stock continued its slide on Friday after the bank suspended its dividend and disclosed higher borrowing costs eating into its valuation, despite an unprecedented $30 billion deposit from 11 major U.S. banks.

Bank stocks suffered big losses and weighed on the broad equities market as optimism around the Thursday move by the big banks quickly faded.

Analysts at Wedbush slashed their price target on First Republic to $5, a fraction of where the bank is trading now. Leading the sector into the red, First Republic's stock fell 33%.

JPMorgan Chase & Co. (JPM) CEO Jamie Dimon, U.S. Federal Reserve Chair Jerome Powell and U.S. Treasury Secretary Janet Yellen came up with the joint bank deposit during a phone call on Tuesday, a source familiar with the situation confirmed to MarketWatch.

The genesis of the deal was reported by the Wall Street Journal and other publications on Friday. The move was described as an "extraordinary effort to stave off financial contagion," as the New York Times reported.

JPMorgan analysts said the move by banks to help a smaller rival was a positive. "However, news late last night of a post market drop in First Republic's stock price is likely to rattle investors as markets remain fragile," they wrote early Friday.

At the closing bell on Friday, JPMorgan Chase (JPM) was down 3.8%, Citigroup (C) was down 3%, Bank of America (BAC) fell 4% and Wells Fargo WFC moved lower by 3.9%. Those four banks each made $5 billion in uninsured deposits into First Republic Bank.

Goldman Sachs (GS) fell 3.7% and Morgan Stanley (MS) dropped 3.3%. Each provided $2.5 billion to the package of deposits for First Republic.

Bank of New York Mellon (BK) and State Street (STT) were down 4.1% and 4% respectively, while Truist (TFC) was down 7.2%, U.S. Bancorp (USB) was down 9.4% and PNC Financial Services (PNC) was down 4.9%. Those five are providing $1 billion each.

Pershing Square Capital chief Bill Ackman said the $30 billion injection by the banks spreads the default risk to the U.S.'s largest banks and that the move amounted to "bad policy."

"The structurally important banks would never have made this low return investment in deposits unless they were pressured to do so and without assurances that [First Republic Bank] deposits would be backstopped if it failed," Ackman wrote in a tweet late Thursday.

Overall, banks have borrowed $165 billion from the Fed in the past week, following the failure of Silicon Valley Bank on March 10, according to data released Thursday by the U.S. Federal Reserve.

Moody's reiterated its negative credit outlook on U.S. banks and said the $153 billion in borrowing from the Fed's discount window in the past week, up from $5 billion in the previous week, marked the largest amount of Federal Reserve discount-window borrowing on record.

"The data indicate the ongoing, credit negative strain on bank funding," Moody's said.

First Republic's (FRC) stock fell 32.8% on Friday as Wall Street weighed the influx of deposits against disclosures from the company about borrowing in recent days to address withdrawals. The bank also suspended its dividend to conserve cash.

First Republic reported $34 billion in cash as of Wednesday, not including the additional $30 billion in uninsured deposits from the 11 banks.

First Republic also revealed the amount of interest it's been paying on loans to cover deposit withdrawals in recent days, as fears of contagion rocked bank stocks after the failures of Silicon Valley Bank, Signature Bank and Silvergate Bank in the past week.

First Republic has been perceived as the next domino to fall because it served many wealthy clients from venture-capital and banking circles around Silicon Valley.

First Republic said after the closing bell on Thursday that it had borrowed between $20 billion and $109 billion from the Federal Reserve at an overnight rate of 4.75% between March 10 and March 15. It also increased short-term borrowing from the Federal Home Loan Bank by $10 billion at a rate of 5.09%.

Jefferies analyst Ken Usdin said the borrowing revealed that First Republic's total deposits dropped by up to $89 billion in the past week.

"With [First Republic's] earnings profile clearly impaired, the new deposits effectively bridge the estimated $30.5 billion of uninsured deposits still on [the bank's] balance sheet, providing time for [it] to likely explore a sale," Usdin said.

Wall Street analysts diverged on the impact of the $30 billion deposit from the 11 banks.

While Wedbush cut its price target on First Republic to $5 a share and downgraded the stock to neutral from outperform, JPMorgan Chase singled it out as a top pick and set a price target of $62 a share.

The $30 billion infusion by 11 banks is a plus, but the bank has also increased liabilities in order to shore up its liquidity, analysts said.

This will in turn "increase interest expense materially, and puts the bank in a very tough position from a profitability standpoint," Wedbush analysts said.

A sale of the bank amounts to the best option to avoid bankruptcy, they said, and "should be beneficial for the banking system as a whole, and should help ease contagion fears. However, given the fair value marks embedded in both its loan and securities portfolios, we find it difficult to come up with a realistic scenario where there's residual value for [First Republic] common equity holders."

JPMorgan Chase analyst Steven Alexopoulos said, "We've covered the bank sector for over two decades and we have never seen the industry come together before to help secure a peer in need."

However, he said, the bank will face questions from investors on whether the $30 billion of incremental deposits is enough and also on how changes to its balance sheet will affect the earnings power of the company.

The stock is currently trading well below total book value and well below "burn-down" total book value for unrealized losses on its hold-to-maturity assets, Alexopoulos said.

First Republic remains a "a higher-risk but potentially very high-reward name," he added.

Meanwhile, SVB Financial Group (SIVB) said Friday it has filed for Chapter 11 bankruptcy in New York and will seek a court-supervised reorganization.

The filing does not include SVB Capital or SVB Securities funds and general partner entities, which are continuing to operate as SVB Financial explores its strategic options.

SVB Financial is no longer affiliated with Silicon Valley Bank, which was placed into receivership last week by the Federal Deposit Insurance Corp. after a run on its deposits.

Among other financial stocks in the spotlight, Charles Schwab Corp. (SCHW) fell 2.3%. The financial-services firm reported "strong" inflows of net $16.5 billion in the past week and billed itself as a "safe port in a storm."

Western Alliance Bancorp (WAL) reported "significant inflows and new account openings" in recent days. It also said it experienced elevated net deposit outflows on Monday. Western Alliance's stock fell 15.1%.

"Western Alliance remains in a strong position, with immediately available liquidity of over $20 billion as of March 16," the bank said.

As of Thursday, Western Alliance said insured deposits represented more than 55% of its total deposits. The total includes deposits eligible for "pass-through" deposit insurance.

Also read: 'High proportion' of startups may fold by year's end following Silicon Valley Bank failure, Morgan Stanley says

-Steve Gelsi

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03-17-23 1620ET

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