JPMorgan/First Republic Bank: shareholder losses dwarf saviour’s gains

Jamie Dimon says the “mini-banking crisis is over.” JPMorgan Chase, the bank that he leads, prevailed in a weekend auction for the assets of First Republic Bank.

FRB along with Silicon Valley Bank and Signature Bank had each built niche lending practices. These succumbed to the flight of uninsured deposits over the past two months, forcing the US Federal Deposit Insurance Corporation to rescue them. Rival buyers emerged to scoop up the bulk of their businesses.

They had a collective equity market capitalisation of $47bn on March 1. This has been wiped out.

Their demises have little to do with poor asset quality. Instead, they reflect the vagaries of portfolios whose carrying values were eroded, on paper, by higher interest rates. Their businesses will continue in some form. But the breakage costs have been severe. The question is whether their destruction was ultimately necessary.

JPM is assuming $186bn in FRB assets, mostly in the form of its loan and mortgage book, while taking on $168bn of liabilities. For the privilege of taking on that net asset value of $18bn, JPM is making a $11bn payment to the FDIC. JPM said that it would book an after-tax gain of $2.6bn while it would see an annual net income benefit of $500mn, roughly 1 per cent of its 2022 earnings.

JPM’s market capitalisation increased by $11bn, or 3 per cent on the day. That equity gain of JPM, added to earlier increases for acquirers of Silicon Valley Bank and Signature Bank, totals $20bn. The FDIC has estimated that the loss to its depositor insurance fund across the three is $35.5bn.

The difference between the gains to the buyers against the losses for both the FDIC and the failed banks market capitalisations a few weeks ago can be chalked up to a few factors. First, the banking business has become more perilous with higher interest rates and a choppier macroeconomy.

Second, to induce private sector buyers to take on assets and deposits, US regulators had to be willing to accept a bargain price. The FDIC deposit insurance fund is subsidised by levies on banks, who will now contribute to recapitalise that pool.

Big acquisitions are tricky and often fall short of expectations. For this threesome, however, the seismic tragedy of rivals have generated windfalls.

The Lex team is interested in hearing more from readers. Has JPMorgan struck a good deal for FRB? Please tell us what you think in the comments section below.