Wall Street is surprised by First Republic's falling stock. Here's how the bank compares with SVB

Published Mon, Mar 13 20233:39 PM EDTUpdated Mon, Mar 13 20235:51 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

Shares of First Republic were in free fall Monday, catching by surprise the Wall Street analysts who saw it as one of the top brands among midsize banks. The stock lost 61.8% on the day, and was down more than 75% at one point, as investors scrambled to discover how the collapse of Silicon Valley Bank on Friday could ripple through the financial system. The drop for First Republic suggests that many fear it might also fail. FRC 1D mountain First Republic's stock was down by more than 75% at one point on Monday. The dramatic slide puzzled many Wall Street analysts, however, who still see First Republic as a strong bank even after SVB's demise. JPMorgan's Steven Alexopoulos called the move a "dramatic overreaction" and kept his overweight rating on the stock. "While we understand (and are not surprised) that the collapse of Silicon Valley Bank sparked a wave of selling across the bank universe, we were very surprised to see FRC shares trading down more than our typical bank. In fact, during periods of panic selling, FRC shares typically outperform with the company typically considered a port in the storm," Alexopoulos said. Even the analysts who were more skeptical on First Republic weren't forecasting disaster. Downgrades from Raymond James and Wolfe Research both cited lower earnings caused by a smaller deposit base, while Bank of America said it removed its rating altogether because the stock trading appeared to be unmoored from fundamentals. Here's a look at some of the pressure points for First Republic and how it compares with SVB. Customer mix One issue for First Republic is that it is seen as friendly to venture capital and startup companies. This was the primary business for SVB. However, First Republic said last week that no industry category accounts for more than 9% of its deposits, and the tech industry accounted for only 4%. While venture capital-backed and startup companies can come from any industry, JPMorgan said this should show that the bank is well diversified. "One needs to look no further than the most recent full year results from each bank whereas SVB's deposits fell by $16B (or -9%) in 2022 while First Republic's deposits increased by $20B (or +13%) in 2022," Alexopoulos said. And while First Republic falls into the bucket of regional banks, its customer base is spread out geographically, according to Atlantic analyst John Heagerty. "We note that the bank has increased its geographic diversification over the past decade with loan exposure to the wider San Francisco area now down to 34% (from 56% two decades ago). The bank's lending portfolio is also low risk and well diversified by type," Heagerty said in a note to clients reiterating his overweight rating on the stock. On the other hand, the bank has relatively few small retail deposit accounts compared with many of its peers, which makes it more at risk of deposit flight . Deposits and liquidity Another issue that helped bring down SVB was an unusually high percentage of uninsured deposits — close to 90% of its total deposits at the end of December . First Republic also has this problem, but to a lesser extent. First Republic's filings indicate that the bank had about $120 billion of its deposits uninsured at the end of December, or roughly 68% of its total deposit base. The bank said in a filing Friday that its average deposit account size was under $200,000 for customer accounts and under $500,000 for businesses, meaning that many of the accounts would fall under the $250,000 threshold for insurance from the FDIC. First Republic said Sunday night that it had $70 billion of liquidity after securing some additional funding coming from JPMorgan Chase and the Federal Reserve over the weekend. The bank could also, in theory, access additional capital through the new funding facility created by the Fed. Under normal circumstances, $70 billion would be more than enough to meet even abnormally heavy withdrawals. But after SVB clients withdrew more than $40 billion Thursday, the fact that First Republic may not have liquidity available for all of its deposits could be a source of concern. "While uninsured deposits are not 100% covered by immediate liquidity, we believe that the First Republic franchise remains healthy," Heagerty said. First Republic's deposit mix has likely changed in recent days, though the company has not released updated numbers. Executive Chairman Jim Herbert told CNBC's Jim Cramer that the bank wasn't seeing many of its depositors leave but declined to put a specific figure on the withdrawals. First Republic did not immediately respond to a request for further comment Monday. Balance sheet breakdown First Republic's asset mix is also much different from SVB's, though the implications for how that would affect the bank's ability to manage a rush of withdrawals are less clear. For one, First Republic has the majority of its assets as loans instead of securities. As of Dec. 31, First Republic had $3.3 billion of available-for-sale securities, $28.3 billion in held-to-maturity securities, and more than $166 billion of loans. SVB, in contrast, had more than $90 billion in held-to-maturity securities alone at the end of December . Having more loans won't necessarily be enough to keep a bank afloat. Signature Bank, which was seized by regulators Sunday, also leaned more heavily on loans than SVB did. Additionally, the new funding facility from the Fed will let banks swap certain securities for cash, but likely not First Republic's loan book. First Republic could in theory strike deals with other banks to pledge some of its loans in exchange for cash. Another consideration is that First Republic's loans are largely residential real estate. While those loans are probably viewed as safe because of the bank's high-end customer base, their value could be hurt by the recent rise in interest rates. — CNBC's Michael Bloom contributed to this report.