Former divisional leader at First Republic
- Operating environment for First Republic Bank (NYSE: FRC), considering current market performance
- Q1 2023 earnings reactions
- Health of First Republic's remaining deposit mix and loan portfolios
- 2023 outlook – potential options the bank may have moving forward
What are your initial reactions following First Republic’s Q1 2023 earnings results? What 2-3 trends or drivers stood out to you most?
As you mentioned, First Republic’s earnings call was less than 15 minutes, no questions taken and there was an eeriness around the lack of information here. What do you think is going on behind the curtain?
To your point, deposits aside, the earnings actually revealed that First Republic performed better than a lot of analysts had expected, so we have a huge mix in reactions following recent earnings. You have one group saying that the company performed better than expected, while the other side is saying that the institution is really a zombie bank today. Where do you land between these two different opinions?
How would you assess the quality of First Republic’s executive management team and its reactivity to risk overall?
How do you think First Republic could have positioned itself better to avoid being included in March 2023’s turmoil events, if it’s anything else besides taking a better position on interest rate risk?
Clearly we’re in a new age of banking, complemented by Twitter, social media and instant communications. What do you think needs to be changed sector-wide either from a regulatory or risk angle for banks to manage potential social contagion, given that we’re in a completely different environment than we were 10 or 20 years ago?
I’m glad you brought up FedNow because the timing couldn’t be worse for the launch of an instant transfer system. How will bank treasury systems reposition themselves across the whole industry? Do you think that with FedNow and social media’s roles in inciting bank runs will have treasury departments looking at their deposits at a much shiftier basis? What pivots do you think most banks would try to activate to stem heightened concern on the deposits moving forward?
How do you think banks are looking at the introduction of FedNow? Does this mean that banks are going to have to integrate this system into their rails by July 2023, or do you think they’re already trying to integrate it?
How has the regional banking industry as a whole altered in light of recent systemic changes? Is this the end of low-cost funding for many of these banks, or are net income margins going to look significantly different for the entire sector moving forward?
Let’s say the cycle runs its course and we’re in an environment where interest rates are on the decline. Even in a lower interest rate environment, do you still think everyone’s learned their lesson? There are clients that have the influence in trying to find banks that will continuously offer the higher rates. Apple recently announced high-yield savings account. More and more players are realising that what you give back to depositors matters. Is that something that you think we’ll continue to see, even in a lower interest rate environment?
There was an industry expectation that many of First Republic’s deposits were going to return to the bank following some recorded stability. I’m not sure if you can call the earnings results recorded stability. This was mainly due to the fact that the deposit base was inherently more diverse than other banks that had fallen in the past month or so. Now that we’ve seen earnings reporting a roughly 41% loss in deposits, do you think the expectation that deposits are going to return to the bank still holds?
Can First Republic hold on until the cycle runs its course? You’re seeing the bank’s expense base balloon, anticipating higher funding costs across both deposit pricing and the expectation of potential further borrowing, although that’s not confirmed at all. What else can the bank do to manage its expense base? It’s already announced a significant amount of lay-offs among other expense management functions, so paring back office space and cutting executive compensation. How much further can First Republic shrink its balance sheet to stay afloat?
Comparing what we’ve seen at First Republic with other institutions, the loss at the bank is in the same scale as the deposit outflows experienced by Credit Suisse, which had its own idiosyncratic issues. Is the writing on the wall, given what we’re seeing and the lack of improvement? Why haven’t we seen a regulatory body step in the same way it did with Signature in the blink of an eye?
What do you think shrinking or restructuring First Republic’s balance sheet can and will look like?
What do you think we might see in terms of First Republic’s loan performance, especially in a more pronounced recessionary environment? How should we be thinking about delinquency, default and net charge-off rates? Where do you see the most risk in the bank’s books?
How might First Republic recuperate and reposition itself moving forward? This is clearly an intrinsic trait of the bank but it does cater to high-net-worth individuals. Do you think that we can see an emphasis among regional banks to greater diversify their insured vs uninsured deposit mix, ie potentially service to a lower amount of high-net-worth individuals, who frequently are above that FDIC [Federal Deposit Insurance Corp] limit?
It doesn’t seem you’re most concerned with First Republic’s exposure to CRE [commercial real estate] but there are a significant number of regional banks that do have that really high exposure to CRE. Given decreases in loan-to-value, what options do you think the bank has? Even if First Republic’s exposure is minimal, given that it’s already underwater, how do you think it might look to manage what exposure it does have to CRE?
Given we’re going to expect further rate increase and a longer hold, this cycle just seems to continue for longer and longer. Considering First Republic’s current market performance vs where it was pre-March, what needs to occur for us to see some sort of material change? Clearly positive earnings sans deposits didn’t seem to do the trick.
What are the puts and takes of a potential buy-out scenario for First Republic? It was initially exploring a sale in March but stepped back from that position. What do you think was going through the minds of management in thinking about a buy-out and stepping back? Would it reconsider selling the institution given earnings performance?
If First Republic were to consider downsizing its balance sheet, are there any specific business or service lines where you think the bank had relatively weaker footing that it might be more inclined to depart with to focus more on core services?
What sort of regulation do you think we can see coming from recent events?
Many people have floating thoughts around whether or not the FDIC should increase its insurance limit, while others think that increases to that insurance limit will not solve anything. Where do you land here?
Do you potentially see a closer shift for the US banking system towards standards outlined in Basel regulations?
This was a highly anticipated earnings season for the whole sector and while we did see stellar performance from larger banks, recent earnings from the smaller regionals over the last 1-2 weeks haven’t proven to be the most positive. Given recent news and earnings, do you think we’re headed for a round two of panic or concern for the sector, specifically for those smaller banks?
We saw historic deposit outflows from regional banks to larger banks and money market funds. Do you think we can expect this trend to hold, given that confidence wasn’t necessarily restored based on recent earnings?
What level of industry consolidation among regional banks do you think we can expect over the next year, given the higher perceived level of confidence and stability in the larger institutions?
Considering that JPMorgan led a rescue initiative recently for First Republic specifically, do you think that was a one-and-done or could we expect more of those, if not for First Republic but for others? What role do large institutions play in looking to save smaller institutions?
How might you expect other regionals to navigate current conditions? Similar to SVB and Signature, we saw other VC- or tech-exposed banks such as Western Alliance, Zions and Comerica also reporting relatively mixed, if not negative, earnings. Will the next shoe to drop be in that cohort or are you looking elsewhere in the sector?
We did see a certain number of fintechs, particularly business banking-focused fintechs, experience relatively positive outcomes, given March’s events and turmoil for regional banks. Could this situation be a relative win for fintechs?
How do you think the role of fraud management is going to change in banks? What level of increased or decreased spend do you think will be experienced by this specific service line as a result of recent events?
Do you think we’re going to see a heightened level of fraud in a more pronounced recessionary environment, especially considering the onset of FedNow?
What is your 6-12-month outlook for First Republic, highlighting some best- and worst-case scenarios?
Is there anything else you’d like to highlight?
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