First Republic Bank Fighting For Its Life as ‘Rescue’ Reveals Bad News

While the support from America’s largest banks by injecting $30 billion of deposits into no-moat-rated First Republic Bank FRC might appear to be a positive on the surface, it confirms some of our worries about what has occurred.

Prior to this event, we did not know for sure if First Republic had indeed experienced a true run on the bank or if perhaps it would be able to maintain its deposit base relatively intact. Disclosures made by First Republic regarding this latest liquidity injection remove all doubts that a significant runoff of deposits has occurred.

First Republic Profitability In Doubt

Further, the borrowing rates from the Federal Reserve (4.75%), the FHLBank system (5.09%), and the other banks (market rates) are not economical for a bank that was earning 3.5% on its earning assets just last quarter. Based on the potential range of deposits that may have fled, we believe the bank could already be unprofitable on a go-forward basis.

First Republic’s future will be determined by its ability to get depositors to return once the initial panic has worn off, and there are no guarantees this will happen. If the bank cannot do this, we believe it will likely need to be acquire.

Lowering Fair Value Estimate on First Republic Stock

Based on this news, we are decreasing the weighting on our $88 scenario to 20% from 30% and increasing the weighting on our $23 scenario to 45% from 35%, resulting in an updated fair value estimate of $34 (down from $41 before this news was released). We had already projected that the bank would have to cut its dividend completely in 2023, so that news was not surprising, but the amount of implied deposit runoff exceeds our base-case assumptions, driving our fair value estimate decrease.

While consensus still has a price target of $140 for First Republic, even our most bullish scenario can’t get us there. Instead, we see a bank fighting for its life. First Republic may yet make it, but it’s not even close to being out of the woods.