Citi lays out the possible outcomes for First Republic after banking crisis

Published Thu, Mar 23 20232:13 PM EDTUpdated Thu, Mar 23 20233:17 PM EDT

The path forward for First Republic after this month's banking crisis remains unclear, but Citigroup identified some possible scenarios for the embattled San Francisco-based bank. Citi analyst Arren Cyganovich withdrew his neutral rating, old $132 price target and his financial estimates on First Republic, saying the stock now has an "under review" rating. While the bank hasn't specified its deposit outflows, Citi noted that they've been substantial. First Republic shares went into freefall this month after it disclosed that it had borrowed tens of billions of dollars from the Federal Reserve and the Federal Home Loan Banks to deal with deposit outflows. The stock is down about 90% this month. FRC YTD mountain First Republic shares YTD "This puts the bank in an unprofitable position, meaning some action needs to be taken relatively quickly to stem capital depletion," Cyganovich wrote in a Thursday note. In fact, CNBC's David Faber reported this month that JPMorgan is advising First Republic on strategic alternatives , including a capital raise or possible sale. Given this, Citi reviewed three possible scenarios for First Republic. The Wall Street firm noted that all outcomes will be "challenging to accomplish." A takeout has been floated as one possible alternative for First Republic, but any sale would be a "big goodwill pill to swallow" for any potential buyer, hurting their own balance sheet. Cyganovich said that a takeover couldn't work without some government intervention. "The acquiring bank would be required to recognize the fair value of the assets and liabilities at the time of acquisition, and the after-tax impact of the $27B of fair value unrealized losses would equate to $20.8B, which exceeds FRC's 4Q22 tangible common equity by $13.6B," Cyganovich wrote. "All in, we see a takeover without some form of government intervention to absorb some of the capital charge as an unlikely outcome," Cyganovich added. It's hard to see whether a capital raise or shrinking the bank, the second and third options for First Republic, would be tenable without knowing the full scale of deposit outflows, according to Cyganovich. Using media reports of an estimated $70 billion in withdrawals, he expects that's been replaced by higher-cost funding. "We use our prior model assumption of interest-bearing deposits at 2.6% for the withdrawn deposits for 2023 interest expense and assume that the $70B of replaced funding is 4.75% (similar to what the large banks provided)," the note said, referring to the 11 banks that last week deposited $30 billion at First Republic in a show of faith. "The net negative impact of higher funding costs would be $2.9B by our rough estimate. Again, without knowing the actual level of deposit outflows, the underlying situation could vary quite a bit from our estimates," Cyganovich continued. Meanwhile, the analyst said a government intervention is the most likely scenario, though difficult to forecast. Cyganovich said the form it will take also remains uncertain, such as the size of a capital infusion and the taxpayer protections like warrants or a payback period. "Given the challenges of the first two outcomes above, some form of government intervention seems increasingly likely, albeit in what form remains unclear," the analyst wrote. "Overall, any government intervention could adversely impact shareholders, the extent of which, however, remains unknown."