First Republic's Struggle For Survival In Lending Sector Chaos: 4 Analysts Weigh In, Possible 'Distressed M&A Sale ... Could Leave Minimal Residual Value'

Zinger Key Points
  • First Republic Bank assesses strategic alternatives following S&P Global Ratings and Fitch Ratings downgrading it to "junk" status.
  • Despite a strong reputation, First Republic faces a potential $13.5B capital hole in a fair value acquisition scenario.

Amidst the turbulence in the lending sector caused by the downfall of SVB Financial Group's SIVB Silicon Valley Bank, First Republic Bank FRC, a prominent San Francisco headquartered-bank, is said to be assessing various strategic alternatives to navigate through challenging times.

In the aftermath of receiving a "junk" status on Wednesday from esteemed credit rating agencies S&P Global Ratings and Fitch Ratings, First Republic is now actively exploring a range of options to secure its financial footing — and analysts aren’t being quiet about it.

The Wedbush Analyst: David Chiaverini downgraded First Republic from an Outperform to a Neutral rating, and lowered the price target from $140 to $5.

Chiaverini’s concern with First Republic is due to a possible distressed M&A sale, which could leave minimal residual value for common equity holders due to the bank's negative tangible book value.

Despite its strong reputation, Chiaverini said the bank faces a potential $13.5 billion capital hole in a fair value acquisition scenario. Wedbush estimated the recent actions taken to bolster liquidity could increase interest expenses, putting the bank in a challenging position regarding profitability, and making a sale the most favorable option to prevent receivership.

The $30 billion large banks injected to stabilize the bank may only serve as a temporary solution, bridging the gap to a potential sale, Wedbush said.

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The Oppenheimer Analyst: Chris Kotowski chose not to cover the stock, but gave Oppenheimer’s take on industry support for the faltering bank.

Kotowski thought regulators seem to view First Republic as a responsible lending institution facing short-term liquidity issues, making it worth saving. The analyst said if regulators were seriously concerned about the viability of First Republic even with the emergency funding package, they wouldn’t have allowed the $30 billion in deposits from the 11 large banks that contributed to liquidity injection.

The Raymond James Analyst: David Long downgraded First Republic from a Strong Buy to a Market Perform rating, and did not give a price target.

Long said to put the $30 billion First Republic borrowed into perspective: in the fourth quarter of last year, First Republic reported a yield on average interest-earning assets of 3.51%, up from 3.23% in the third quarter of last year, and a loan yield of 3.53% in the fourth quarter, an increase from 3.26% in the third quarter.

The bank's total deposit costs in the fourth quarter averaged 0.99%, with an overall cost of funds at 1.12%.

The RBC Capital Markets Analyst: Jon Arfstrom issued a Sector Perform rating on First Republic, and gave a $150 price target on the stock — though Arfstrom’s sentiment is negative.

Arfstrom said the $30 billion intervention was designed to bolster confidence in the banking system and help the bank meet its liquidity needs.

While this provides temporary support, Arfstrom’s concerns remained regarding potential margin pressure due to borrowing costs being higher than asset yields. RBC noted the bank is suspending its common dividend and focusing on reducing borrowings, but unanswered questions remain about its business model, future liquidity and regulatory scrutiny.

FRC Price action: Shares of First Republic are trading 23.78% lower to $26.12, according to data from Benzinga Pro.

Read Next: First Republic Rallies As Major US Banks Pledge Assistance To Calm Markets

Photo: Casimiro PT via Shutterstock

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