Rescuing First Republic may leave bank stockholders stranded

WHATEVER plan emerges to preserve First Republic Bank (FRC) might not leave much for shareholders of the troubled California lender.

That’s because the bank’s tangible book value is far underwater, according to Wall Street analysts, creating a capital gap of as much as US$13.5 billion — a sum that may help explain why no saviour appears to have stepped forward. While a government-aided deal could emerge and leave the bank standing, the same won’t necessarily be true for stockholders.

“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 FRC common equity holders,” Wedbush analysts led by David Chiaverini said in a Mar 17 note to clients, which he reaffirmed by email on Wednesday (Mar 22). “Our base case scenario is that there would be no residual value for shareholders in either a distressed M&A sale or through receivership.”

A representative for San Francisco-based First Republic declined to comment. The stock, which traded at more than US$120 at the beginning of the month, fell 15 per cent to US$13.33 on Wednesday after First Republic’s leaders agreed to forgo 2023 bonuses. Morgan Stanley analysts reckon the bank’s stock might be worth just US$1 a share in its bear-case analysis, and Wedbush pegs it at US$5, weighing multiple possible outcomes.

The big hurdle is First Republic’s book of underwater loans and securities. Most acquirers, including banks, would have to immediately record those losses on their own books, which would mean a big hit to their own financial statements. First Republic’s portfolio has losses of about US$26.8 billion, leaving a negative common equity of US$13 billion, Morgan Stanley analysts Manan Gosalia, William Tackett and Brian Wilczynski said in a research note on Monday.

In the Wedbush note, Chiaverini and Brian Violino indicated that First Republic’s tangible book value would be negative US$73 per share at the end of last year if its holdings were valued at current market prices. That would mean an acquirer would be dealing with a “US$13.5 billion capital hole”.

First Republic last week staved off a potential collapse after 11 of the biggest US banks agreed to park a combined US$30 billion in deposits with the California lender, but the injection was merely a short-term fix.

Wall Street leaders and US officials discussing an intervention at First Republic are exploring the possibility of government backing to encourage a deal that would shore the bank up, according to people with knowledge of the situation. The group has floated a variety of measures to make First Republic more attractive to potential investors or a buyer, the people said.

The track record for investors when the government gets involved hasn’t been encouraging. Notices from the Federal Deposit Insurance Corporation about the takeover of SVB Financial Group’s Silicon Valley Bank and Signature Bank made a point of saying that shareholders and certain unsecured-debt holders weren’t protected.

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“It’s important to be clear: Shareholders and debtholders of the failed banks are not being protected by the government,” Treasury Secretary Janet Yellen said in prepared remarks for delivery at a Senate subcommittee hearing on Wednesday.

Bonds issued by First Republic have been trading at deeply distressed levels. Its 4.375 per cent subordinated bonds with a 2046 maturity were quoted at 62.5 US cents on the dollar on Wednesday.

A recapitalisation of First Republic would “effectively wipe out” current holders of common stock by heavily diluting their share in the firm, said Abbott Cooper, an activist investor who worked on transactions involving failed banks during the 2008 financial crisis. First Republic had a market capitalisation of roughly US$2.8 billion as of Wednesday. “They’re just going to be diluted to nothing.” BLOOMBERG