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- First Republic's first-quarter report and earnings call revealed the impact of SVB's failure.
- The bank's deposits plummeted, spurring it to borrow more than $100 billion at one point.
- First Republic plans to cut back on lending, which may fuel fears of a wider credit crunch.
First Republic's financial report and earnings call on Monday revealed the brutal impact of the banking fiasco on the lender, and management's plan to prevent the company from collapsing like Silicon Valley Bank.
SVB's failure has stoked fears that other lenders could succumb to bank runs, or pull back on loaning money and spark a credit crunch that chokes the US economy. First Republic's bosses are taking a bunch of steps to shore up the bank's finances, and those include cutting back on lending.
Scrambling to survive
SVB ran into trouble because it had a high percentage of uninsured deposits, and invested heavily in long-dated bonds that slumped in value once the Federal Reserve began raising interest rates last spring.
The lender sold a load of those bonds at a loss, and tried to raise money by issuing shares in March. The apparent rush to shore up its finances sparked concerns about the bank's stability, which led customers to withdraw their deposits in droves. The bank run overwhelmed SVB, and the Federal Deposit Insurance Corp. took control and guaranteed all of its deposits.
First Republic also faced a tidal wave of withdrawals last quarter, as customers worried it might follow in SVB's footsteps. Exclude $30 billion of uninsured deposits provided by a consortium of Wall Street banks, and the lender's deposits shrank by $102 billion or 58% during the first three months of this year.
The bank filled the resulting void with debt. Its borrowings surged from below $20 billion at the end of December to $138 billion in mid-March, and remained at $107 billion as of March 31.
First Republic also raised nearly $400 million by issuing shares, secured access to additional liquidity, and accepted the $30 billion in uninsured deposits from the likes of JPMorgan and Bank of America.
Even so, the bank's net interest income shrank by 19% year-on-year to $923 million, and its net income fell by a third to $269 million, as the deposit flight increased its funding costs.
Staving off disaster
First Republic's bosses tried to reassure investors in the earnings release and during the bank's call on Monday. They highlighted a range of steps they're taking to bolster the lender's finances and de-risk its business.
They noted First Republic had $45 billion of liquid assets and unused borrowing capacity as of April 21. That's more than double the dollar value of its uninsured deposits, if the $30 billion from Wall Street is excluded. They also flagged their decision to suspend dividends on both common and preferred stock as a cost-saving measure.
Moreover, First Republic's management emphasized the bank's commercial real-estate portfolio makes up only 6% of its total loans, and has an average loan-to-value ratio of only 46%.
Several commentators have warned the CRE industry's deep reliance on debt from regional banks, coupled with rising borrowing costs and downward pressure on property prices, leave it particularly vulnerable to a credit crunch or further banking turmoil.
The bank's bosses also noted that uninsured deposits totaled $20 billion or 27% of its total deposits at the end of March, if the$30 billion from Wall Street is excluded. They plan to reduce that percentage by attracting more insured deposits from new customers, small businesses and non-profit organizations. They also intend to focus on keeping existing customers happy, and to make the most of their preferred banking offices.
First Republic will also seek to slash its loan balances, in part by making fewer loans and by selling loans on the secondary market. Moreover, it intends to reduce its expenses by paring executive compensation, shrinking its office footprint, and jettisoning peripheral projects and activities. It expects to lay off between 20% and 25% of its workforce this quarter as part of its cost-cutting efforts.
"Through these actions, the Bank intends to reduce the size of its balance sheet, reduce its reliance on short-term borrowings, and address the challenges it continues to face," First Republic's bosses said in the earnings release.
Navigating a tricky period
First Republic was hit hard by the collapse of SVB and the subsequent fallout, and forced to borrow heavily to offset the deposit exodus. Now the bank plans to make uninsured deposits a smaller part of its business, pull back on lending, and slash costs to shore up its finances and make itself less vulnerable to a bank run.
The update from the lender hints at significant fallout from SVB's failure, which initially sent shockwaves through the financial system and tanked regional bank stocks. Moreover, First Republic's intention to be more cautious in its lending may fan fears of a wider credit crunch.