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First Republic Bank plans $100 bn asset sale to shore up balance sheet

In addition to selling assets, the bank also plans to focus on loans that can be sold on the secondary market

Photo: Bloomberg

Photo: Bloomberg

Bloomberg

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By Gillian Tan and Matthew Monks

First Republic Bank is exploring divesting $50 billion to $100 billion of assets as the beleaguered lender attempts to rescue itself from the turmoil that engulfed the industry last month.
 
The sales, which include long-dated mortgages and securities, are aimed at reducing the mismatch between the bank’s assets and liabilities — one of the factors that has left First Republic teetering after a run on deposits in March, according to people familiar with the matter. 

Potential buyers, including large US banks, could receive warrants or preferred equity as an incentive to buy assets above their market value, one of the people said. 

A day after First Republic reported earnings that fell far short of analysts’ estimates, the full extent of the challenges facing the bank are dawning on investors. A key component of its prior success — the wealth-management business for ultra-rich clients — may have its wings clipped. And now it’s also facing the prospect of having to unload a large portion of its assets. The shares fell as much as 50%.

The lender is trying to shore up its balance sheet to avoid being seized by the Federal Deposit Insurance Corp. and clear the path for a possible capital raise, the person said. It may need the US government to facilitate negotiations with some of the country’s largest banks to stabilize the lender as it executes its turnaround, the person added. That would be a much cheaper alternative than a failure of the company. 
A spokesman for the San Francisco-based firm declined to comment. 

In addition to selling assets, the bank also plans to focus on loans that can be sold on the secondary market, it said Monday. That’s a sharp departure from its old strategy of providing interest-only jumbo mortgages, a service that attracted legions of rich borrowers and helped build the company into a wealth-management giant.

That business is now under pressure after dozens of advisers jumped to top rivals, including Morgan Stanley, UBS Group AG and Royal Bank of Canada. It has also left analysts concerned for the future of a once-prized business that attracted clients from wealthy enclaves across the US. 

First Republic had total assets of $233 billion as of March 31, including $173 billion of loans and $35 billion of investment securities, according to its first-quarter earnings report.

An asset-liability mismatch can happen when interest rates rise, forcing banks to pay depositors a higher interest rate than what they charge borrowers. At First Republic, that problem is particularly significant because a large portion of its assets are single-family mortgages made when interest rates were at historic lows. Unloading those would help alleviate the mismatch.

The problem: Loans made when rates were low are worth less now, which means First Republic would have to book a loss when it sells them unless it entices buyers to scoop them up at near face value. For that, buyers may demand some kind of sweetener such as warrants.

Adding to the pressure is First Republic’s willingness over the years to entice rich homebuyers and property investors with rock-bottom rates for several years. Some of the mortgages even allowed borrowers to avoid repaying principal for a decade.


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First Republic extended earlier declines after Bloomberg reported its proposed asset sales. The shares dropped 49% to $8.12 at 3:47 p.m. in New York. They were down as much as 30% earlier Tuesday after the firm reported a bigger-than-expected drop in deposits in the first quarter. The figure fell to $104.5 billion, well below the $137 billion average of analyst estimates compiled by Bloomberg. The total included a $30 billion infusion from 11 of the largest US lenders. 

The bank on Monday confirmed it’s exploring strategic options. “We are working to restructure our balance sheet,” Chief Financial Officer Neal Holland said in a statement. 

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First Published: Apr 26 2023 | 7:18 AM IST

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