The $30 billion rescue package announced for beleaguered First Republic Bank (FRC) Thursday raised hopes that the crisis for that bank and the banking system as a whole would ease.
But so far that’s not the case. The KBW Nasdaq Bank stock and First Republic shares both fell sharply Friday.
DON’T MISS: SVB: Financier Bill Ackman Rips First Republic Bank Rescue Plan
Don’t expect a sustained rebound for the stock, says Derek Chiaverini, a bank stock analyst at Wedbush Securities. He slashed his share-price target for First Republic to $5 from $140 Friday, and he downgraded his rating to neutral from outperform.
First Republic is likely seeking a bank willing to buy it. “We believe a distressed sale [of First Republic] could result in minimal, if any, residual value to common equity holders,” he wrote in a commentary.
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That’s because of FRC's “significant negative tangible book value, after taking into account fair values on its loans and securities,” Chiaverini said. “We note that an acquisition target's assets must be marked to fair value in an acquisition.”
First Republic’s Liabilities Mount
Also, “we estimate that the combined actions taken on the liability side of the balance sheet over the last week to shore up liquidity could increase interest expense materially,” he said.
The $30 billion rescue package consists of deposits into First Republic by major banks such as JPMorgan Chase and Bank of America. Also, First Republic announced last weekend that it has funding commitments from JPMorgan and the Fed.
“That puts the bank in a very tough position from a profitability standpoint, thus making a sale the best option to avoid receivership,” Chiaverini said.
That could be a good thing, he said. “A sale of FRC to larger entity should be beneficial for the banking system as a whole, and should help ease contagion fears.” But as he mentioned above, it wouldn’t do much good for the bank’s shareholders.
“FRC's tangible book value, when marked to fair value as of Dec. 31, was negative $73 per share, which would represent a $13.5 billion capital hole for a potential acquirer,” Chiaverini said.
First Republic’s Strong Reputation isn’t Enough
“While the company has an exceptionally strong reputation and franchise value, we are doubtful that the valuation accorded to these factors would be enough to cover the tangible book value shortfall.”
Bottom line: “our base case scenario is that there would be no residual value for shareholders in either a distressed acquisition sale or through receivership,” Chiaverini said.
Meanwhile, hedge fund heavyweight Bill Ackman, chief executive of Pershing Square Capital Management, sees a need for First Republic’s depositors to be bailed out.
“FRB is no SVB,” he wrote on Twitter. “It is a well-managed, well-capitalized, high-service bank with good assets that is beloved by its clients. It is caught up in a bank run due to no fault of its own. It does not deserve to fail.”
So, “we need a temporary systemwide deposit guarantee immediately until an expanded and modernized FDIC insurance system is made widely available,” Ackman said.
