The troubled San Francisco-based lender, First Republic, is in dire straits with its stock down a massive 41% on Wednesday alone, and a 95% decrease for the year-to-date. The bank is seeking to sell assets and raise fresh capital to keep itself afloat. First Republic's rivals are at risk of paying for its struggles, whether it survives or gets taken over by the FDIC.
The bank has billions of unrealized losses on its loans and investments, including a significant book of single-family mortgages issued when interest rates were much lower. Massive deposit outflows, roughly $100 billion in Q1 alone, have hit the bank hard, and selling its loans would trigger outsized losses, potentially wiping out its equity cushion. This is one of the reasons why the bank's stock is trading down so heavily, with its current valuation at a little more than $1 billion. Investors are essentially forecasting that the bank is close to worthless once those losses are realized.
First Republic is now seeking a way to shift its assets to other banks without taking on a massive loss. One solution is to sell the loans for more than their actual worth, by adding some equity-type instrument like warrants or preferred equity to give the buyers more upside.
According to CNBC's Hugh Son, First Republic's pitch to potential buyers is that if it's seized by the FDIC, other banks would face a bill of $30 billion. The FDIC extracts alevy from healthy banks to help pay for the collapse of those that fail. So it's better for banks to come up with a rescue deal now, taking a small loss, than let First Republic fail and end up paying more to the FDIC.
Private equity firms could also step in and take on some of First Republic's problem assets, with banks taking on the rest. The likes of JPMorgan and Bank of America could end up paying $500 million each, should they take on the assets along the same lines that they stepped up with $30 billion in deposits in March.
It's clear that the bank's rivals will end up paying for First Republic's struggles; it's just a matter of how much and how. First Republic must act quickly to find a solution that will not lead to its demise and avoid further costs to the industry.
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