First Republic/JPMorgan: Deal Brings Benefits for JPMorgan, End for First Republic Shareholders

JPMorgan Chase has acquired First Republic Bank FRC from the FDIC, effectively zeroing out First Republic equityholders. Because the latter bank is no longer a separately traded entity, we are dropping coverage of First Republic. We had assigned a very high probability (84%) that its shares were worth zero well over a month ago and actually dropped our fair value estimate to $0 on April 27. We were at the low end on the Street in both instances.

The transaction appears to be a good deal for JPMorgan, which will assume all of First Republic’s deposits and take over much of its assets after the latter was closed by the FDIC. JPMorgan had to pay an additional $10.6 billion to the FDIC as part of the asset assumption, while the FDIC estimates that the cost to the insurance fund will be around $13 billion. We think the key point overall is that the depositors are being made whole, which satisfied the regulators.

With the deal expected to generate an additional $500 million in annual net income for JPMorgan, it look as if the bank is going to be able to immediately make the balance sheet profitable by reworking the funding side of things. We would guess that the FDIC helped with this effort by providing $50 billion in fixed-rate funding for the deal (although the exact rate for the funding was not disclosed).

The key strategic benefit for JPMorgan, in our view, will be the boost to its wealth business and the potential client relationships it can keep as part of the takeover. The key risk will obviously be retention of First Republic’s clients as well as its advisor talent. While there are some other risks associated with the transaction, this seems like a good deal overall for JPMorgan, as the bank is estimating an internal rate of return of over 20%. That is a good number, in our view, and above several of the more recent deals we’ve seen in our coverage.