Since a financial update on March 16, things have been somewhat quiet with First Republic (FRC +0.00%), one of the banks that has really struggled since the banking crisis started in March. The bank reportedly saw $70 billion or more of deposit outflows in March, which has led some to question whether it can survive.
While there have been some signs of stabilization in the banking sector, I think it's too early for First Republic to declare victory by any means. But just taking an educated guess, I think we could get some kind of update from First Republic within the next week before the big banks kick off earnings season. Here's why.
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Some issues are coming to a head
It's no secret that First Republic is struggling. The deposit outflows have forced it to take on higher-cost funding to replace the deposits that left the bank, and this could cut into earnings pretty dramatically. There have been reports of advisors leaving First Republic's wealth management business, which is an important part of the bank. First Republic is sitting on unrealized losses among its bond holdings and its large mortgage portfolio as well.
Interestingly, First Republic is usually one of the first banks to report its earnings results each quarter. For example, the bank reported its fourth-quarter earnings for 2022 on Jan. 13, which was the same day as JPMorgan Chase (JPM 1.61%), the largest bank in the U.S., which typically kicks off earnings season. I haven't seen any news release on First Republic's website regarding a first-quarter earnings date, but given that next week is when the bank would typically report earnings, simply not doing so will be an indicator to the market.
Interestingly, JPMorgan Chase's CEO Jamie Dimon recently said in his annual letter to shareholders that he does not think the banking crisis is over yet. We know from media reports that Dimon is supposedly heavily involved in trying to come up with a rescue plan for First Republic, so many have wondered whether or not Dimon is referencing it in some capacity with that statement, although he could simply be speaking more broadly as well.
What is the potential announcement?
It's obviously hard to say exactly what an announcement would entail if it comes at all, but it does seem like a sale of the bank is unlikely. First Republic is likely looking at a large hole in its balance sheet when you consider the fair value of its bond portfolio and large mortgage portfolio, which makes the bank unattractive to buyers. Additionally, many of the larger regional banks, which could be potential suitors, have recently completed acquisitions.
The bank could just release its earnings results later on in April or even May, because companies do have 45 days after a quarter ends to file their financial statements with the Securities and Exchange Commission (SEC). Time could benefit First Republic, especially if the bank can figure out a way to somehow bring some customers back and pay off some of their higher-cost borrowings.
NYSE: FRC
Key Data Points
One potential and more likely scenario is that next week, First Republic will provide some kind of limited update on its first-quarter financials and deposit levels, which could be worse or better than expected. First Republic could also say that it doesn't think it will be able to report its earnings on time as well. Silvergate Capital did that shortly before winding down its operations, and shares tanked. But perhaps investors are expecting bad news, given that First Republic has already struggled immensely.
Another thing that I find unlikely is First Republic being taken into receivership by the Federal Deposit Insurance Corp. (FDIC). The FDIC's Depositors Insurance Fund has already taken a roughly $23 billion hit due to the collapse of SVB Financial and Signature Bank, so I don't think the FDIC is going to want to add more losses right now. The larger banks may be on the hook for covering the majority of these losses, so it's also in their best interest for First Republic to hang around, even if it needs to significantly shrink its balance sheet.
Don't try to trade on the update
While I do think there is a good chance that First Republic will provide some kind of update soon, I would not recommend trying to trade based on it. Shares have been very volatile, and I do think the bank is likely going to struggle at the very least in the near term because of the challenges it faces from an earnings perspective.
First Republic is arguably one of the most speculative trades in the banking sector right now, which is in one of its most uncertain times. I would recommend staying on the sidelines until there is further clarity.
