June 5, 2023

Great Indian Mutiny

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First Republic stock fell after S&P downgraded its credit rating again

First Republic stock fell 13% shortly after the market opened Monday after S&P Global downgraded the regional bank again and warned that its $30 billion bailout package would not be enough.

Ratings agency S&P downgraded the bank’s long-term debt rating to junk status, to B+ from BB+, on Sunday. It’s the second time S&P has cut the bank’s credit rating in less than a week, after lowering it from A- to BB+ on Wednesday.

The stock (Ticker:FRC) closed down 33% on Friday despite a consortium of 11 US banks, including JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C), pledging $30 billion in… the bank. for a period of not less than 120 days. The intervention did not help the stock. S&P said it should ease liquidity pressures in the near term, but it may not end the bank’s woes.

“This may not solve the significant business, liquidity, funding and profitability challenges that we think the bank is likely to face now,” said Nicholas Wetzel, credit analyst at S&P Global.

He added that the bank “was probably under high liquidity pressure with large inflows of deposits over the past week.” He cited the injection of cash into major banks, the First Republic

He revealed that his daily loans from the Federal Reserve ranged between $20 billion and $109 billion from March 10 to March 15, and he suspended dividend payments.

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S&P said it had granted First Republic a “negative CreditWatch” status, indicating its rating could fall further if the bank does not begin to show progress in stabilizing deposits.

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It wasn’t all bleak for other US regional banks that were hit hard last week. Shares in PacWest Bancorp (PACW) rose 22%. New York Community Bancorp (NYCB) rose 34% after its Flagstar Bank subsidiary agreed to buy most of the signature bank’s operations.

In Europe, bank stocks fell after UBS Bank (UBS) agreed to buy rival Credit Suisse (CS), in what UBS President Colm Kelleher described as an “emergency bailout”. Credit Suisse shares fell about 50% as the market assessed the deal, while UBS shares initially fell and rose 8%.

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In a note on Monday, Hovde Group analysts said that while banking risks remain, their underlying case was that “the worst is over.”

“There could still be issues depending on uncertain actions by the Fed and regulators, but we still think ‘contagion’ will be limited to large increases in funding cost pressures affecting NII (net interest income), and potential recessionary effects.” they added.

However, they still expect 2023 and 2024 earnings estimates for the banking sector to need to be trimmed by 10% to 15% in the best case scenario.

Write to Callum Keown at [email protected]