: First Republic sinks bank stocks as investors shrug off $30 billion infusion

JPMorgan Chase & Co.
JPM,
-2.75%
CEO Jamie Dimon, U.S. Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen came up with the joint bank deposit during a phone call on Tuesday, a source familiar with the situation confirmed to MarketWatch.

The genesis of the deal had been reported by the Wall Street Journal and other publications. The move was described as an “extraordinary effort to stave off financial contagion,” as the New York Times reported.

JPMorgan analysts said the move by banks to help a smaller rival was a positive. “[H]owever, news late last night of post market drop in First Republic’s stock price is likely to rattle investors as markets remain fragile,” they wrote early Friday.

JPMorgan Chase
JPM,
-2.75%
was down 0.7%, Citigroup
C,
-2.78%
was down 1%, Bank of America
BAC,
-2.97%
was down 1.2% and Wells Fargo
WFC,
-3.44%
fell 0.8%. Goldman Sachs
GS,
-2.19%
and Morgan Stanley
MS,
-1.69%,
which each provided $2.5 billion to the package, were down 0.6% and 0.7%, respectively.

Bank of New York Mellon
BK,
-3.11%
and State Street
STT,
-2.89%
were down 0.2%, Truist
TFC,
-4.46%
was down 1.5% and and US Bancorp
USB,
-4.90%
was down 1.4%. Those four are providing $1 billion each. PNC Financial Services
PNC,
-4.35%
was down 0.9%.

First Republic’s stock fell 13% in premarket trades after it reported $34 billion in cash as of Wednesday, not including the additional $30 billion of uninsured deposits from the 11 banks.

The bank also revealed the amount of interest it’s been paying on loans to cover deposit withdrawals in recent days as fears of contagion rocked bank stocks after the demise of Silicon Valley Bank, Signature Bank and Silvergate Bank in the past week. First Republic was often perceived as the next domino to fall because it served many wealthy clients from the venture-capital and banking circles around Silicon Valley.

First Republic said after the closing bell on Thursday that it borrowed between $20 billion and $109 billion from the Federal Reserve at an overnight rate of 4.75% between March 10 and March 15. It also increased short-term borrowing from the Federal Home Loan Bank by $10 billion at a rate of 5.09%.

Wedbush on Friday downgraded First Republic Bank’s stock to neutral from outperform and slashed its price target on the stock to $5 a share, a fraction of its current level of around $29 a share in premarket trades.

While the $30 billion infusion by 11 banks is a plus, the bank has also increased liabilities in order to shore up its liquidity, analysts said.

This will in turn “increase interest expense materially, and puts the bank in a very tough position from a profitability standpoint,” Wedbush analysts said.

A sale of the bank amounts to the best option to avoid bankruptcy, they said.

“A sale of [First Republic] to larger entity should be beneficial for the banking system as a whole, and should help ease contagion fears,” the analysts said. “However, given the fair value marks embedded in both its loan and securities portfolios, we find it difficult to come up with a realistic scenario where there’s residual value for [First Republic] common equity holders.”