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Wedbush Analyst Says First Republic Equity Could Be Wiped Out On Takeover, Stock Worth $5

Wedbush Analyst Says First Republic Equity Could Be Wiped Out On Takeover, Stock Worth $5

First Republic Bank takeover

Screenshot from CBS vieo on YouTube, March 16, 2023, https://www.youtube.com/watch?v=EWtDJ36yZgs

Share prices in First Republic Bank continued to fall Friday despite a $30 billion rescue plan put together by the U.S. Treasury, the Federal Reserve and 11 of the largest U.S. banks that may have failed to overcome investor fears of an imminent collapse.

First Republic’s stock has lost about 75 percent of its value since last week when depositors pulled cash from several midsized lenders after the sudden collapse of Silicon Valley Bank.

Many regional banks have large amounts of uninsured deposits over the $250,000 FDIC (Federal Deposit Insurance Corporation) limit. First Republic has 68 percent of total deposits that are uninsured, according to S&P Global. That sounds small compared to Silicon Valley Bank’s percentage of uninsured deposits — 94 percent of its total.

The $30 billion cash infusion is meant to give the struggling San Francisco bank cash to meet customer withdrawals and help improve confidence in the U.S. banking system during a bad time for lenders.

First Republic suspended disclosed it has $34 billion in cash excluding the new deposit injection. It also disclosed it had borrowed up to $109 billion from the U.S. Federal Reserve and another $10 billion from the Federal Home Loan Bank on March 9.

A sale of the bank would be beneficial to the broader banking sector, and the “best the option to avoid receivership,” according to Wedbush Securities analyst David Chiaverini.

However, a potential sale of First Republic could be bad news for the bank’s shareholders, Chiaverini said. It would require marking its loans and securities to fair value, and wipe out equity value for shareholders. Chiaverini downgraded the bank stock from outperform to neutral.

Chiaverin cut his price target from $140 to $5 a share, representing more than 85 percent downside from Thursday’s close.

“A distressed M&A sale could result in minimal, if any, residual value to common equity holders owing to FRC’s significant negative tangible book value after taking into account fair value marks on its loans and securities,” he said.

In a note to clients, Jefferies analyst Ken Usdin said the “new deposits effectively bridge the estimated $30.5 billion of uninsured deposits still on FRC’s balance sheet providing time for FRC to likely explore a sale.”

The situation is not over, according to John Petrides, portfolio manager at Tocqueville Asset Management. “Possibly the market is looking for an all-out sale/buyer rather than an injection of capital,” he said.

“The significance of the changes in FRC’s balance sheet in just one week are staggering, in our view, and along with the suspension of the common stock dividend, paints a very dire outlook for the company and shareholder,” KBW analysts wrote.

Fed data on Thursday showed banks asked for a record $152.9 billion in emergency liquidity from the Federal Reserve in recent days, bypassing the previous high set during the worst phase of the 2008-2009 financial crisis, Reuters reported.

First Republic isn’t the only bank whose share prices were down Friday.

Shares in other regional U.S. banks as well as the largest banks also fell on Friday, including a 13 percent decline for Western Alliance Bancorp, a 7 percent fall for Comerica, an 8 percent slide in KeyCorp, and a 6 percent drop in Zions.

Shares in the largest banks such as JPMorgan and Bank of America, which investors view as being less susceptible to large-scale deposit withdrawals, were also trading lower, Financial Times reported.