First Republic announces the results and shows a decline in deposits. Dangers of a new banking crisis?

Moments ago the regional bank at the forefront of the banking crisis, First Republic , whose shares plunged from $125 to $12 a month ago amid a broader banking crisis, released its closely followed results. In reality, the numbers aren't that terrible: The company beat both EPS and net interest income and revenues :

Q1 Revenue: $1.2 billion, -14% year over year, beating estimates of $1.12 billion.
First quarter EPS (earnings per share): $1.23, beating estimates by $0.72
Q1 Net Interest Income: $923MM, -19%, but beating estimates of $889.9MM.

The balance sheet appears relatively solid:

• Common equity Tier 1 ratio 9.32%, beating estimates of 8.84%.
• Provision for credit losses $16 million, up 60% y/y, below estimates of $22.2 million.
• Common Equity average yield 6.55% vs. 11.9% y/y, estimated 4.22%.
• New deposits $11.44 billion, -36% y/y
• Available-for-Sale Debt Securities $3.41 billion, +1.9% q/q, above $2.8 billion estimate
• Debt held-to-maturity $31.39 billion, up 11% q/q, above estimate $28.21 billion (this is a problem)
• Cash and Cash Equivalents $13.16 billion versus $4.28 billion for the quarter, well above estimates of $3.62 billion.

The company has also “optimized” expenses:

• Noninterest Expenses $852 million, -1.6% Y/Y, below estimates of $898.1 million.
• The bank is also taking steps to reduce expenses, "including significant reductions in executive compensation, condensing corporate offices and curtailing non-essential projects and activities." The Bank also expects to reduce its workforce by approximately 20-25% in the second quarter.

But the thing everyone was looking at was the bank's deposit and loan exposure, and this is where the bank reported a bombshell: Deposits as of March 31 were down 41% from $172 billion at the end of the year. year at $104.5 billion at the end of the quarter (including $30 billion from a consortium of banks, so actually $74 billion), and then fell another 1.7% through April 21, which that is, if nothing else, a good thing: at least the pace of outflows is slowing down.

Some additional information: “Deposit activity began to stabilize beginning the week of March 27, 2023 and remained stable through Friday, April 21, 2023. Total deposits amounted to $102.7 billion as of April 21, 2023, with a decrease of only 1.7% compared to March 31, 2023, which mainly reflects the seasonal payments of customer taxes that occur each April ”.

The problem is that those roughly $100 billion in deposits also include about $30 billion from the bailout consortium of banks, including JPM, Citi, and so on. Here's how the bank described the recent bank run:

“ In response to unprecedented deposit outflows, the Bank strengthened its financial position through access to additional liquidity from the Federal Reserve Bank, the Federal Home Loan Bank and JP Morgan Chase & Co. Total lending reached the maximum peak on March 15, 2023, at 138.1 billion dollars. At that time, the Bank had $34.0 billion of cash on its balance sheet. As of April 21, 2023, total loans amounted to $104.0 billion, while cash and cash equivalents amounted to $10.0 billion. This includes $25.5 billion in long-term advances with the Federal Home Loan Bank, up from $7.3 billion as of December 31, 2022 .

And some more details on the funding front:

Other funding sources as of March 31, 2023 included short-term Federal Reserve-backed loans, securities sold under repurchase agreements, and short- and long-term FHLB advances, totaling $105.9 billion. That's both bad news, as the bank needs about $100 billion in emergency funding to stabilize its operations, and good news, as the situation hasn't worsened in the past month.

Against this collapse in deposits, the bank's March 31 loans increased 3.9% to $173.31 billion, beating estimates of $168.31 billion, indicating that the bank is not at least making sweep of assets and is instead relying on the goodwill of funding from the Fed and JPM (+ other banks) to stay alive.

The bottom line is that FRC has borrowed about $100 billion in emergency loans on which it is paying about 5% mixed interest. How long it can continue to do so is yet to be seen, but until then it is likely that this will wipe out about 100% of the bank's net interest income. The only potential way out is that FRC somehow manages to sell its vital loans (many of which are IO loans backed by Hampton properties) at near parity and repay the Fed, FHLB and the consortium. banking. With $173 in loans (as a reminder that most of FRC's loans are New York super prime real estate), it could find enough loans to repay the emergency loans and start rebuilding its balance sheet without too many losses. And sure enough, management just confirmed this assumption:

The bank took some time to discuss its jewel, the wealth management group, which manages about $290 billion in assets. Most notably, FRC has "retained nearly 90% of its total wealth management professionals and expects to retain a portion of the wealth management business associated with the outgoing teams." A few more details:

As of March 31, 2023, total wealth management activities were $289.5 billion, an increase of 6.7 percent from the prior quarter, and included investment management activities of $118.9 billion, brokerage and money market funds of $149.7 billion and trust and custody assets of $20.9 billion.

Wealth management fees, which include income from investment management, brokerage and investment, insurance, fiduciary and foreign exchange fees, totaled $223 million in the quarter, an increase of 6.7% over the quarter previous. These revenues represent 18.5% of the Bank's total revenues.

So First Republic remains a bank in crisis that is supported only by the benevolence (and calculation) of the big lenders and the emergency funds of the FED. The flight of deposits has been staggering, and without these loans, the bank would have collapsed. This way it can survive another couple of years, maybe just in time to get to the next QE of the FED. Easy money will help.

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The First Republic article releases the results and shows a decline in deposits. Dangers of a new banking crisis? comes from Economic Scenarios .

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This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/first-republic-rende-noti-i-risultati-e-mostra-un-calo-nei-depositi-pericoli-di-una-nuova-crisi-bancaria/ on Tue, 25 Apr 2023 07:00:23 +0000.