: First Republic sinks bank stocks as investors shrug off $30 billion infusion

JPMorgan Chase & Co. JPM, -3.43% CEO Jamie Dimon, U.S. Federal Reserve Chair Jerome Powell and U.S. Treasury Secretary Janet Yellen came up with the joint bank deposit during a phone call on Tuesday, a source familiar with the situation confirmed to MarketWatch.

The genesis of the deal was reported by the Wall Street Journal and other publications on Thursday. The move was described as an “extraordinary effort to stave off financial contagion,” as the New York Times reported.

JPMorgan analysts said the move by banks to help a smaller rival was a positive. “However, news late last night of a post market drop in First Republic’s stock price is likely to rattle investors as markets remain fragile,” they wrote early Friday.

JPMorgan Chase JPM, -3.43% was down 2.8%, Citigroup C, -3.12% was down 3.1%, Bank of America BAC, -3.99% was down 3.1% and Wells Fargo WFC, -4.07% moved lower by 3.5% on Friday morning. Goldman Sachs GS, -3.11% and Morgan Stanley MS, -2.71%, which each provided $2.5 billion to the package of deposits for First Republic , were down 2.3% and 1.7%, respectively.

Bank of New York Mellon BK, -3.98% and State Street STT, -4.31% were down 3.3% and 2.8% respectively, Truist TFC, -5.84% was down 4.6% and and US Bancorp USB, -6.78% was down 5%. Those four are providing $1 billion each. PNC Financial Services PNC, -5.38% was down 4.7%.

Pershing Square Capital chief Bill Ackman said the $30 billion injection by the banks spreads its default risk to the U.S.’s largest banks and that the move amounted to “bad policy.”

The structurally important banks would never have made this low return investment in deposits unless they were pressured to do so and without assurances that FRB deposits would be backstopped if it failed,” Ackman wrote in a tweet late Thursday.

Overall, banks have borrowed $165 billion from the Fed in past week after the Silicon Valley Bank failure, according to data released Thursday by the U.S. Federal Reserve.

Moody’s reiterated its negative credit outlook on U.S. banks and said the $153 billion in borrowing from the Fed’s discount window in the past week from $5 billion in the previous week marked the largest amount of Federal Reserve discount window borrowing on record. 

“The data indicate the ongoing, credit negative strain on bank funding,” Moody’s said.

First Republic’s stock FRC, -24.32% fell 20% on Friday as Wall Street weighed the influx of deposits against disclosures from the company about borrowing in recent days to address withdrawals. It also suspended its dividend to conserve cash.

First Republic reported $34 billion in cash as of Wednesday, not including the additional $30 billion of uninsured deposits from the 11 banks.

The bank also revealed the amount of interest it’s been paying on loans to cover deposit withdrawals in recent days as fears of contagion rocked bank stocks after the demise of Silicon Valley Bank, Signature Bank and Silvergate Bank in the past week. First Republic was often perceived as the next domino to fall because it served many wealthy clients from the venture-capital and banking circles around Silicon Valley.

First Republic said after the closing bell on Thursday that it borrowed between $20 billion and $109 billion from the Federal Reserve at an overnight rate of 4.75% between March 10 and March 15. It also increased short-term borrowing from the Federal Home Loan Bank by $10 billion at a rate of 5.09%.

Wall Street analysts diverged on the impact of the $30 billion deposit influx from the 11 banks.

Wedbush cut its price target on First Republic to $5 a share and downgraded the stock, while JPMorgan Chase singled it out as a top pick and set a price target of $62 a share.

Wedbush cut its rating on First Republic Bank’s stock to neutral from outperform and slashed its price target to a fraction of its current level of around $29.

While the $30 billion infusion by 11 banks is a plus, the bank has also increased liabilities in order to shore up its liquidity, analysts said.

This will in turn “increase interest expense materially, and puts the bank in a very tough position from a profitability standpoint,” Wedbush analysts said.

A sale of the bank amounts to the best option to avoid bankruptcy, they said.

“A sale of [First Republic] to larger entity should be beneficial for the banking system as a whole, and should help ease contagion fears,” the analysts said. “However, given the fair value marks embedded in both its loan and securities portfolios, we find it difficult to come up with a realistic scenario where there’s residual value for [First Republic] common equity holders.”

JPMorgan Chase analyst Steven Alexopoulos said, “We’ve covered the bank sector for over two decades and we have never seen the industry come together before to help secure a peer in need,”

However he said the bank will face questions from investors on whether the $30 billion of incremental deposits is enough and also on how changes to its balance sheet will affect the earnings power of the company.

The stock is currently trading well below total book value and well below “burn-down” total book value for unrealized losses on its hold-to-maturity assets, he said.

First Republic remains a “a higher risk but potentially very high reward name,” he said.

Meanwhile, SVB Financial Group  SIVB, said Friday it has filed for Chapter 11 bankruptcy in New York and will seek a court-supervised reorganization.

The filing does not include SVB Capital or SVB Securities funds and general partner entities, which are continuing to operate as SVB Financial explores its strategic options.

SVB Financial is no longer affiliated with Silicon Valley Bank, which was placed in receivership last week by the FDIC after a run on its deposits. 

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