The stock of First Republic (FRC) plunged 49% Tuesday after the bank surprised investors and analysts by revealing an outflow of more than $100 billion in deposits in March.
The market reaction raised new questions about the fate of a San Francisco lender that was at the center of last month's banking turmoil.
A failure "is certainly a risk,” Autonomous Research analyst David Smith told Yahoo Finance Tuesday. “Deposits came in for the quarter much worse than had been feared."
The bank outlined its survival strategy Monday. It said it plans to increase its insured deposits, trim the borrowings it used to cover customer withdrawals, shrink its balance sheet and reduce its workforce by 20-25% to cut expenses.
It is also pursuing other “strategic” options, including a sale or raising more capital.
Bloomberg reported the bank is considering divesting $50 billion to $100 billion of long-dated securities and mortgages to make an eventual capital raise easier.
CNBC and Reuters also reported that the creation of a "bad bank" was another possibility, referring to a technique used frequently during the S&L crisis in the 1980s and 1990s to deal with troubled bank assets.
First Republic stock, which is now down 93% for the year, was briefly halted for volatility on Tuesday. Other bank stocks also dropped, including some of First Republic's regional rivals.
One was PacWest (PACW), a lender based in Beverly Hills that ended the day down 9%.
PacWest said after the market close that it lost 17% of its deposits, or $5.7 billion, during the first quarter and then gained back $700 million as of April 24. It also recorded a $1.2 billion loss due to a goodwill impairment charge tied to the "decline in our stock price as a result of recent market volatility."
Its stock, which is down 55% year to date, rose in after hours trading by roughly 14% as of 4:30 ET.
HomeStreet (HMST), a lender in Seattle that reported earnings Monday, also sank 35% Tuesday.
'Burning fuel'
Analysts said First Republic, which was the nation's 12th-largest bank as of Dec. 31, faces a lot of uncertainty as it tries to recover from last month's chaos.
“First Republic appears to be in a holding pattern and burning fuel,” Evercore analysts said in a new research note. Wells Fargo analysts said in a separate note that First Republic's existence "very much hangs in the balance."
"The future of this company is very uncertain," added CI Roosevelt Associate Partner Jason Benowitz in an interview with Yahoo Finance. First Republic, he added, "lost so much in deposits, they have to replace that funding somehow, so they’re doing it with borrowing.” The borrowing will “really weigh on their profitability both in the reported quarter and going forward.”
Wedbush lowered its earnings estimates for that very reason, noting that the heavy deposit losses would weigh on profits.
“Where does First Republic go from here?” Wedbush said in its note. “Our base case is that First Republic continues to move forward as a standalone company,” referencing an earlier note in April that argued First Republic faces a "Hobson's choice."
Even a sale of First Republic at $0 a share is unlikely, Wedbush said in that earlier note, because any buyer would still essentially have to pay billions to absorb the unrealized losses on its balance sheet.
Carlyle Group co-founder David Rubenstein told Yahoo Finance earlier this month that the federal government will need to provide some help for First Republic to find a buyer due to this “hole” on the lender’s balance sheet.
“I think First Republic Bank is clearly on a watchlist, and probably somebody at some point will buy it. But the challenge there is that it needs government assistance,” Rubenstein said earlier this month on Yahoo Finance Live.
Bellwether
A lot of money is riding on its fate. Everyday investors have bet $245 million on First Republic stock since the fall of Silicon Valley Bank, according to Vanda Research, the third highest inflow to a specific bank stock behind Bank of America (BAC) and Charles Schwab (SCHW).
It also has one of the highest levels of interest among so-called short sellers betting on the stock to decline, according to analytics firm S3 Partners, accounting for $480 million in such bets over the last 30 days.
First Republic "will be a bellwether of sentiment for the sector," Vanda said in a note last week.
The new hand wringing about First Republic followed the release of its first-quarter results Monday. Its earnings of $269 million were down by 30% from the fourth quarter and 33% from the year earlier period.
What surprised most observers is how many deposits it lost in March. As of March 9, the day before regulators seized Silicon Valley Bank, its deposits were $173.5 billion, down just slightly from the year end. On March 10, it began experiencing "unprecedented deposit outflows."
The net total outflow by the end of March was $72 billion, but the actual number was above $100 million after stripping out a temporary infusion of $30 billion in uninsured deposits from 11 of the country’s largest banks. Those deposits have to stay at First Republic for 120 days, according to a person familiar with the rescue.
The bank said Monday that outflows began to stabilize the week of March 27 and deposit activity "has remained stable" through April 21. Its balance as of Friday was $102.7 billion, a drop of 1.7% since the end of the quarter that the bank attributed to seasonal client tax payments.
"Despite the uncertainty of the past two months, and while average account sizes have decreased, we have retained over 97% of client relationships that banked with us at the start of the first quarter," First Republic CEO Michael Roffler said on a conference call following the release of results.
The company didn't take questions from analysts.
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