First Republic Plunges Anew Amid Elusive Search for Rescue Plan
Comment of the Day

April 28 2023

Commentary by Eoin Treacy

First Republic Plunges Anew Amid Elusive Search for Rescue Plan

This article from Bloomberg may be of interest to subscribers. Here is a section:   

US officials are coordinating talks to rescue First Republic, with the Federal Deposit Insurance Corp., the Treasury Department and Federal Reserve orchestrating meetings about throwing a lifeline, Reuters reported, citing unidentified people. 

But some of the biggest US banks, which have already contributed $30 billion in deposits to prop up First Republic, have balked at getting more involved and potentially throwing good money after bad, Bloomberg News reported. 

The focus has shifted to a US takeover, according to CNBC. For its part, First Republic has acknowledged it’s engaged in discussions with multiple parties about strategic options.

Eoin Treacy's view

It is very likely today is First Republic’s last day of active trading. Trading was halted on several occasions today as the stock plunged anew. By the end of the weekend a deal will have been completed for a large bank like JPMorgan to take it over.
First Republic is another San Francisco bank about to go bust and further highlights how leveraged their business model was. There is a clear issue with banks that lent to prospective high growth, but no earnings businesses, and invested their reserves in long-dated bonds. That deposit guarantee removes one source of instability but does nothing to fix the business model.
Falling yields will be a support for the held-to-maturity part of bank portfolios, while reduced availability of credit will impact earnings. It’s far from an ideal scenario, but the best capitalised banks will come out in a stronger competitive position. If First Republic is taken over, bearish attention is likely to move on to PacWest Bancorp.
The broader issue of banks underperforming against a background of tightening credit, tight monetary policy, inverted yield curve and negative money growth suggests this is a time to be particularly diligent with stops. 

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