First Republic: high-cost funding leaves bank in a tight spot

There is a reason banks do not align the duration of assets and liabilities. On Monday afternoon, First Republic reported its first-quarter results. Assets looked decent, totalling $233bn. That was nearly 10 per cent higher than three months ago. The gross liabilities of the US regional bank had a similar jump.

Its problem is the new composition of those liabilities. Client deposits — excluding a supportive sum from a group of large banks — fell from $176bn to $74bn. The drop was heaviest among customer funds that were earning no interest.

In the stead of deposits were $80bn of short-term borrowings from the US Federal Reserve and Federal Home Loan Bank, drawn in the chaos of mid-March. Those funds cost in excess of 4 per cent. First Republic had no choice but to turn on the government cash faucet in order to cover withdrawal requests from nervous customers in the wake of the Silicon Valley Bank collapse.

The worst of the bank run may be over and First Republic is still standing, but its loan book was originated during more benign times. That leaves the institution’s medium-term profitability badly maimed.

On March 1, the analyst consensus for the next four quarters of profits per share at First Republic was $7 per share. That figure has fallen to a loss of $0.45 per share. Interest income from loans, mortgages and securities will not be able to cover interest expense.

First Republic shares have dropped 86 per cent so far this year. To preserve equity amid forthcoming losses, management has halted common and preferred dividends and announced plans to cut staff by at least a fifth.

Then there is the matter of trying to find a buyer. A large bank with excess deposits or the ability to cheaply refinance First Republic borrowings would be the ideal candidate.

SVB and Signature Bank changed hands in fire sales after being seized by regulators. They were sold at steep discounts to net asset value, with the US Federal Deposit Insurance Corporation assuming the multibillion-dollar losses. There is little reason for a buyer to seek a quick purchase of First Republic. The bank should get cheaper by the day.