On March 13th, 2023, shares of regional banks in the United States suffered heavy losses, primarily due to the fear of potential bank contagion following the collapse of SVB Financial Group and Signature Bank. First Republic Bank, based in San Francisco, was hit the hardest, despite being able to meet withdrawal demands with the help of additional funding from JPMorgan Chase & Co.
Jim Herbert, the executive chair of First Republic, attempted to reassure investors in a CNBC interview, stating that the bank was fully serving the needs of its clients both in its offices and online. However, this did little to stop the downward spiral of the bank’s stock. Multiple trading halts occurred as shares fell 67% to $28.05.
Other regional banks also suffered losses, with Western Alliance, KeyCorp, Comerica Inc, Huntington Bancshares Inc, and PacWest Bancorp all down between 16% and 29%. Trading halts were implemented as the KBW regional banking index fell 5.4%, and the S&P 500 banking index dropped 6%.
Christopher McGratty, the head of U.S. Bank Research at investment bank KBW, highlighted the crisis of confidence in the stickiness of deposits as the real issue for the industry. When depositors panic and withdraw their deposits, things can move very quickly. President Joe Biden vowed to do whatever was needed to address a potential banking crisis, and national regulators took emergency measures on Sunday. First Republic secured additional financing through JPMorgan and the U.S. Federal Reserve, gaining access to a total of $70 billion in funds.
Despite the cash infusion, Raymond James double downgraded the bank’s stock, highlighting the risk of deposit outflows from panicked large depositors after the bank run at SVB. Bank of America slashed its price target on the stock to $90 from $140.
Founded in 1985, First Republic had $212 billion in assets and $176.4 billion in deposits as of the end of last year, according to its annual report. About 70% of its deposits are uninsured, above the median of 55% for medium-sized banks and the third highest in the group after Silicon Valley Bank and Signature Bank, according to a Bank of America note.
The banking rout, which follows several Fed interest rate hikes over the past year, has pushed down yields on the 2-year Treasury note by the most since the financial crisis of 2008. Art Hogan, chief market strategist at B. Riley Wealth, said the market is “finding out in real time what the risk of rising interest rates at such a fast pace can do to the balance sheets of some of the regional banks.”
Hogan said each regional bank has its own exposure to different parts of the market. He added the fate of regional bank stocks will be “case by case” as investors look to see which ones could have the most negative exposure.
Brian Levitt, global strategist at Invesco, said the market is focusing on smaller banks with specialty lending businesses. After Silicon Valley Bank, investors turn their attention to the next bank exposed to interest rate and specific credit risks. “First Republic Bank, which has significant exposure to the coastal real estate markets appears to be next on the list”.
Among Wall Street lenders, Bank of America Corp dropped 3.3%, Citigroup Inc and Wells Fargo slid about 6% each, while lenders in Asia and Europe plunged too.
The U.S. system of Federal Home Loan Banks, which lends to banks and other member financial institutions primarily to help them make mortgages to consumers, is seeking to raise about $64 billion by selling short-term notes, Bloomberg News reported.