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First Republic: high-cost funding leaves bank in a tight spot

There is a reason banks do not align the duration of assets and liabilities. First Republic’s first quarter results show a decent asset tally of assets, totalling $233bn. That was nearly 10 per cent higher than three months ago. The gross liabilities of the US regional bank made a similar jump.

Its problem is the composition of those liabilities. Client deposits — excluding a supportive sum from a group of large banks — fell from $176bn to $74bn. The drop was heaviest among customer funds that were earning no interest.

In the stead of deposits were $80bn of short-term borrowings from the US Federal Reserve and Federal Home Loan Bank, drawn in the chaos of mid-March. Those funds cost in excess of 4 per cent. First Republic had to turn to the government to cover withdrawals in the wake of the Silicon Valley Bank collapse.

The worst of the bank run may be over and First Republic is still standing, but its loan book was originated during more benign times. That leaves the institution’s medium-term profitability badly damaged.

On March 1, the consensus for the next four quarters of profits per share at First Republic was $7 per share. That figure has fallen to a loss of $0.45 per share. Interest income from loans, mortgages and securities will not cover interest expense.

First Republic shares have dropped 86 per cent so far this year. To preserve equity amid forthcoming losses, management has halted dividends and announced plans to cut staff by at least a fifth.

Then there is the matter of trying to find a buyer. A large bank with excess deposits or the ability to cheaply refinance First Republic borrowings would be the ideal candidate.

SVB and Signature Bank changed hands in fire sales. They were sold at steep discounts to net asset value, with the US Federal Deposit Insurance Corporation assuming multibillion-dollar losses.

There is little reason for a buyer to seek a quick purchase of First Republic, apart from first mover advantage. The bank should get cheaper by the day.

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