The difficulties of rescuing a problematic lender
On Monday, First Republic will publish quarterly results for the first time since the collapse of Silicon Valley Bank triggered a regional banking crisis. Moody’s, the credit rating agency, downgraded 11 regional lenders, including Zions and Western Alliance, on Friday. Moreover, despite a $30 billion lifeline offered by some of the country’s top banks, First Republic’s stock has dropped nearly 90% in the last six months.
So, why hasn’t a deal been struck to raise more funds or sell assets — or itself?
The task is significant.
According to reports, First Republic has a $25 billion hole in its balance sheet. This begs the question of who will bear those obligations – and how. According to DealBook, First Republic is attempting to fix the problem through a collaboration of the government, large banks, and private equity (but not necessarily all three). Each of those parties has their own set of priorities, deadlines, and limits. The discussions are still going on.
How much time First Republic has?
First Republic is unlikely to announce a merger in conjunction with its earnings. However, it is expected to provide advise on the durability of its deposit base as well as the magnitude of any prospective losses. Assuming they have moderated, the First Republic still has time to tackle its situation. However, the bank’s move to withhold dividends on preferred shares demonstrates that it is clearly focused on cash management. It has already lost wealth advisers to competitors, and the situation may alter if more shocks to the commercial real estate business trigger another run on deposits, or if other unexpected concerns arise.
Analysts believe the problems are not yet lethal, leaving First Republic in a painful holding pattern.”The only acquisition scenario that we see for FRC is through receivership, in which a would-be acquirer can take advantage of an FDIC-assisted bargain purchase,” Wedbush Securities analysts said on April 10. “As a result, we conclude that FRC will continue to operate as a standalone company for the foreseeable future.”
