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Is the FRC Done?

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Is the FRC Done?

In this comprehensive post from Neeraj Monga, the insolvency of the First Republic Bank is explored.

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.

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.

 

Key points include:

  • Loan Portfolio Pricing
  • Low-Quality & Primarily Real Estate
  • The Loan Portfolio at FRC

 

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