Life comes at you fast in a banking crisis. Megabank JPMorgan Chase (JPM 0.15%) acquired First Republic Bank in a fast-moving auction just hours after the Federal Deposit Insurance Corporation (FDIC) stepped in and seized control of the lender over the weekend. And just like that, America's second-largest bank failure is complete.
If you're catching up on the news, you can read about why First Republic failed here.
Those looking ahead can see what type of deal JPMorgan got and how it can impact the stock moving forward. Here is what you need to know.
An excellent deal for JPMorgan Chase
The FDIC offloaded First Republic Bank quickly, but it looks like JPMorgan is getting a nice deal when the smoke clears. You can see the key details of the transaction below, which boils down to a few important takeaways. In a nutshell, JPMorgan is getting approximately $18 billion in net assets (post-closing assets minus liabilities) for the $10.6 billion it's paying the FDIC.
Image source: JPMorgan Chase & Co.
JPMorgan estimates that the deal will add $500 million of accretive net income to its bottom line, increase tangible book value per share, and generate an internal rate of return of more than 20%. Also, the acquisition doesn't disturb JPMorgan's target CET1 ratio of 13.5% by Q1 of 2024, so it's not degrading its capital structure. Strategically, JPMorgan gains First Republic Bank's 84 branches and its clientele of high-net-worth clients, though time will tell who sticks around through the chaos.
The nature of the deal offers additional protections to JPMorgan, including a loss-sharing agreement for bad loans of 80% for up to five or seven years (depending on the loan). Overall, it seems like a nice deal for JPMorgan to step up in a challenging situation.
Do the rich get richer?
There's not much time to mess around when a bank fails. Millions of people are waiting to access billions of dollars, and the FDIC wants to move as quickly as possible to resolve a situation like this to minimize panic. It was reported that First Republic Bank's auction had several potential suitors, though JPMorgan emerged victorious.
In reality, these situations are a small circle because most banks lack the size to digest a bank as large as First Republic Bank, and the FDIC probably isn't going to spend time trying to piecemeal things.
It could be worth discussing the impact of bank failures on the broader financial system. America's largest banks, such as JPMorgan, were deemed too big to fail during the Great Recession, but they arguably grow stronger when smaller banks fail. This isn't the avenue for that discussion, but it's worth noting because investors might consider the systemic advantages of banks like JPMorgan Chase when making investment decisions.
FRC Market Cap data by YCharts
First Republic Bank recently had a $24 billion market cap, and that's been quickly wiped out. JPMorgan did not assume any of the bank's corporate debt or preferred stock in the acquisition -- creditors and equity holders will be wiped out.
Don't buy JPMorgan Chase based on this deal alone
So, what's the takeaway here? JPMorgan is America's largest bank, and more importantly, its strong financials make it arguably the safest banking stock you can buy in a system where the big players get bigger when the little guy fails.
JPMorgan's stock has traded roughly on par with its average price-to-book value over the past decade, making it worth considering for those seeking safety in their long-term portfolios.
Nobody knows if this is the end of bank failures. But shareholders can reasonably expect banks like JPMorgan to be waiting in the wings if more regional banks begin seeing their foundations crumble.
