First Republic Bank shares fell by 20% today after S&P Global cut the lender’s credit rating to junk.
San Francisco-based First Republic is the 14th-largest bank in the New York market and serves a wealthy clientele, with 68% of the bank’s $180 billion in deposits exceeding the Federal Deposit Insurance Corp.’s $250,000 insurance cap.
S&P described the risk of outflows at First Republic as “elevated” and cut the bank’s credit rating by four notches, from A- to sub-investment grade BB+. S&P said $120 billion in uninsured deposits are “most susceptible to withdrawal, despite the bank’s historically excellent depositor loyalty.” First Republic’s credit outlook remains “negative.”
After the failures of Silicon Valley Bank and Signature Bank, the government tried to stop the panic by promising to guarantee all deposits. It did this by saying banks that need cash could sell most bonds to the government at face value instead of what they’re worth in the market today.
First Republic’s investment portfolio, however, appears to contain a lot of bonds that aren’t eligible for the government assistance program. The bank’s $32 billion investment portfolio is 60% in municipal bonds, which the federal government isn’t accepting as collateral from banks needing cash, Evercore ISI analyst John Pancari said in a client note today. Municipal bonds are typically super-safe securities that yield more than U.S. Treasury bonds because their risk of default is higher.
First Republic didn’t immediately respond to a request for comment.
If deposit outflows continue, First Republic could rely on more costly sources of funding, but that would hurt its “modest profitability,” S&P said.
The bank had $1.7 billion in net income last year.