First Republic Bank is in trouble, and all market participants await today's earnings to learn the extent of the bank's challenges. the stock is down 87% since the regional banking turmoil began in March.
First Republic’s significant loan growth over the last couple of years has been signaling concern for several year. First Republic’s loan portfolio grew almost 24% in 2022. At the end of 2022, three banks in a similar asset range to First Republic were Citizens Financial Group, Fifth Third, and Silicon Valley Bank. In 2022, Fifth Third’s loan portfolio grew 5% while Silicon Valley Bank’s loan portfolio grew by 12% and Citizens Financial Group’s loan group increased by 20%.
Also of concern is that First Republic has a concentration in its assets, primarily in mortgages and municipal securities. With the significant rise in interest rates since last year, if those assets were marked-to-market, they probably have significant losses. According to Fitch Ratings analysts, as of the last quarter of 2022, the fair market value of First Republic’s securities and loans are below their book value.
If the bank has to sell assets, that is, its loan and securities, given their current market value, this could pressure the bank to increase capital significantly. Trying to issue equity or subordinated debt takes time and would be costly.Fitch estimates that due to First Republic Bank’s higher cost of funds, it “is currently operating at a net loss that is not sustainable over the longer term absent a balance sheet restructuring.
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