The US banking system has been hit with yet another blow with the collapse of two more banks – Silicon Valley Bank and BCI Bank. The fallout has been felt by First Republic Bank (FRC), which has seen its shares plummet amidst concerns about its financial health. The bank has been in the midst of a banking contagion that has spread across the banking sector. Analysts predict a 23% decline in the KBW Regional Banking Index this year, which is also adding to the uncertainty surrounding regional banks.
The collapse of Silicon Valley Bank (SVB) last month caused a run on the bank, with depositors fleeing to First Republic. The bank had $173.5bn in deposits before SVB’s collapse and $102.7bn on April 21, including the $30bn deposits from big banks. This surge in deposits put First Republic under strain, leading to concerns about its ability to manage short-term deposit activity. CEO Jim Herbert dismissed these concerns, stating that the bank was “well-capitalised for the foreseeable future” and did not require assistance from the Federal Deposit Insurance Corp (FDIC). However, stockholders were not reassured, and shares of First Republic continued to slide, closing at $5.68, down 95% YoY, from the roughly $170 it traded at in April 2022.
The impact of the banking contagion has spread beyond First Republic. Other regional banks such as PacWest Bancorp and Western Alliance Bancorp have also seen their stocks decline. The KBW Regional Banking Index is predicted to decline by 23% this year as investors lose confidence in the banking sector. Inflation and rising interest rates have also made investors nervous, leading to declines in the stock market. Analysts predict a near-5% fall in 1Q profit for the S&P 500 companies, with 178 companies set to report their 1Q results this week.
The decline of First Republic has been significant, with the bank’s market value dropping below $1bn for the first time since the lender became embroiled in the banking crisis. There are concerns that the bank may not be saved, and rumours are circulating that it is seeking a lifeline. The FDIC has not sanctioned a takeover of First Republic in the same way it took control of SVB last month, leading to speculation that the US government is unwilling to step in and rescue the bank.
First Republic was downgraded for the second time in a week by S&P Global, adding to declines in the bank’s stock. The Wall Street Journal reported that JPMorgan was working on another rescue plan with other lenders, with potential discussions around converting some of the $30bn in deposits from 11 banks into shares, potentially diluting stock held by existing shareholders. Although First Republic did not comment directly on the report, it said it was well positioned to manage short-term deposit activity. Analysts remain uncertain if the bank can attract enough deposits to solve its funding issues, despite a recent rescue deal.
The Federal Reserve will begin its two-day policy meeting on March 29 to decide whether to raise interest rates by a quarter of a percent due to high inflation or hold them until stability in the financial system improves. The decision will have a significant impact on the banking sector, and it remains to be seen whether the decline of First Republic is a sign of more challenges to come.
In conclusion, the decline of First Republic Bank in the wake of the banking contagion has highlighted the challenges facing the US banking sector. The collapse of Silicon Valley Bank and BCI Bank has had a significant impact on regional banks, and the uncertainty around the sector has made investors nervous. The decline of First Republic has been a significant blow, and it remains to be seen whether the bank can attract enough deposits to solve its funding issues. The Federal Reserve’s decision on interest rates will be critical, and it remains to be seen whether stability in the financial system will improve in the coming months.
