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A Long Credit Suisse and Short FRC Bet


A Long Credit Suisse and Short FRC Bet

Neeraj Monga shares an article on the recent banking news.

First Republic Bank (“FRC”, or the “Bank), with a current market capitalization of $4.2B, is still standing with conflicting opinions as to its viability. Although The Federal Reserve (“The Fed”), the U.S. Treasury, and a consortium of the largest U.S. banks agreed to provide deposit support of $30B for 120 days to FRC, the stock closed 32.8% lower for the day at $23.03. It declined an additional 15% after-market hours[1]. Last month, February 07, 2023, the Bank issued 2.875 million shares of common stock at approximately $143.69/share for net proceeds of $397M[2].

We do not believe that the so-called deposit lifeline changes the underlying economic reality of the Bank. Although FRC reported book equity of $75.38/share for 2022, we estimate it is effectively insolvent. Although the deposit lifeline extended by U.S. financial institutions is a confidence-boosting measure, many of these institutions could suffer a yet undeterminable loss on these deposits. Figure 1 highlights our thinking.

Figure 1 – Fair Market Value of Assets and Liabilities at FRC

Main Assets 2022 Source

Book Value Fair Value Deficit 2022 10-K Filing

HTM Securities $28,359 $23,587 -$4,772 Note 3 – Page 143

AFS Securities $3,347 $3,347 $0

Real Estate Loans $136,793 $117,520 -$19,273 Note 15 – Fair Value of Financial Instruments – Page 180

Other Loans $29,291 $26,405 -$2,886 Note 15 – Fair Value of Financial Instruments – Page 180

Total $197,790 $170,859 -$26,931

Common and Preferred Stock A $17,446 Page 127, 10K

Total Debt on Books B $16,831 FactSet

Total Capital C $34,277 Common Stock + Preferred Stock + Debt

Net Economic/Solvency Surplus D $7,346 Total Capital – Deficit

Fully Diluted Shares Outstanding (M) 187.3 FactSet

Loss on Equity 100% A less Deficit

Loss on Bonds -56% 100% -(D/B)

Book Value on a Solvency Basis $0.00

The deposits provided by the consortium will displace deposits that are fleeing or being repriced. The $30B provided by the consortium will likely cost somewhere between 4%-5%, and although it is meant for 120 days, if it stays for a year, the Bank will have to pay $1.2B, at a minimum, to keep these deposits. FRC reported interest expenses of $888M for all of 2022 on its entire deposit & debt obligations of approximately $179B for 2022. In 2022, $75B of the Bank’s deposit base was non-interest bearing.

Interest Expense WIll Rise Exponentially

Therefore, simplistically, if $100B of deposit base in 2023 requires 4% to stay put, the Bank’s interest expense, without considering its debt-related funding costs, will increase by $4B YoY. That is, if it can keep its deposits. We do not believe that FRC can. That compares to the reported interest income of $5.7B in 2022 when the Bank was in a growth mode and rapidly grew its loan book by $30B.

Loan Portfolio Pricing Stays Put

In either instance, the liquidity problem is further compounded by an asset-liability mismatch of immense proportions. The deposits will price upwards from an average cost below 89bps to around 4% by Q2-2023. However, only 20% of the loan portfolio will reprice upwards in 2023. That implies the entire balance sheet is upside down.

Key points include:

  • The Loan Portfolio at FRC

  • Deposits At FRC

  • Net Interest Income and Net Interest Margin

Read the full article, First Republic Bank : Murphy’s Law in Action – Effectively Insolvent, on