With more than 40 years of experience researching banks, Dick Bove, 82, has earned a reputation as the dean of banking analysts.
So who better than the Odeon Capital chief financial strategist to discuss the troubles of First Republic Bank (FRC)?
DON'T MISS: First Republic Hits Record Low, Amid Deposit-Flight Concern
It's the focal point of regional banks’ woes now. The stock has plunged more than 60% since Monday, after a troubling first-quarter earnings report.
The bank lost about $100 billion of customer deposits in March, the month when the regional bank crisis erupted, leaving it with $105 billion of total deposits. And revenue dropped 13% in the first quarter.
Bove thinks the bank will be able to avoid failure without the government requiring much change. He thinks regulators should push banks to reveal the true value of their assets and increase their equity.
Here are his comments.
TheStreet.com: How do you think the First Republic saga will play out?
Dick Bove: I think it will survive with the money that has been put into it. The first-quarter balance sheet shows that the government actually owns it. First Republic has about $75 billion of [regular] deposits and $30 billion from the big banks. [JPMorgan Chase and others combined to deposit that sum into First Republic last month as a sign of confidence in the bank.]
Then it has $105 billion in loans from the Federal Reserve and the Federal Home Loan Bank. Real equity [assets minus liabilities] is probably negative $14 billion. The entity that owns First Republic is really the U.S. government.
TheStreet.com: What about an FDIC (Federal Deposit Insurance Corp.) Takeover?
Bove: If the FDIC was to take over First Republic, it wouldn’t have enough money to repay the government loans. The FDIC insurance fund had $129 billion as of the third quarter, and it spent $23 billion on other banks. They could sell other assets, but the loss there would be about $31 billion. Plus there are $51 billion of insured deposits.
The FDIC could impose a one-time charge on U.S. banks to pay for its losses on First Republic. But then 4,000 banks would be paying for the losses of one. I doubt that will happen.
TheStreet.com: What can the Fed do?
The Fed could step in and say the big banks must convert their $30 billion of deposits into common equity. First Republic doesn’t have bad loans, just misvalued loans. So First Republic could sell loans, take a loss up to $30 billion and still have common equity. But then the big banks will have to take the loss.
First Republic founder Jim Herbert knows the government is stuck, that it can’t take over. He’s saying he won’t do anything the government wants and will wait it out, because the bank can turn it around. If he hangs in long enough, he can turn things around, and the Fed will get paid back. But we’re talking years.
To turn it around, he will have to keep depositors from fleeing in the short term. If there’s a recession, which I think there will be, interest rates will come down. Then the value of First Republic’s assets will go up.
TheStreet.com: Do other banks face issues too?
Bove: Yes, no fixed-rate loan is worth what a bank’s balance sheet says it is. The government needs a series of rules to get big banks [and the others] to show accurate values of their assets. We have a crisis in the banking industry. It’s not as bad as 2008, but no one can have confidence, because there isn’t truth on balance sheets.
The government also must push to get more equity into banks. They have done massive buybacks instead of putting money into the business.
TheStreet.com: Is there a risk that the damage will spread beyond First Republic?
Bove: Yes. If the government lets First Republic go, we will have a run on banks. They have to do something. They should take the steps that I just mentioned.
TheStreet.com: Do you think the bank turmoil will cause the Federal Reserve to stop raising interest rates?
Bove: No, that will stop because inflation is dead. There’s no need to raise interest rates anymore, but it looks like they might anyway.
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