First Republic Bank weighs up to $100bn in asset sales

BLOOMBERG 

First Republic Bank is exploring divesting $50 billion to $100 billion of assets as the beleaguered lender attempts to rescue itself from the turmoil that engulfed the industry in March.
The sales, which include long-dated mortgages and securities, are aimed at reducing the mismatch between the bank’s assets and liabilities — one of the factors that has left First Republic teetering after a run on deposits in March, according to people familiar with the matter.
Potential buyers, including large US banks, could receive warrants or preferred equity as an incentive to buy assets above their market value, one of the people said.
A day after First Republic reported earnings that fell far short of analysts’ estimates, the full extent of the challenges facing the bank are dawning on investors. A key component of its prior success — the wealth-management business for ultra-rich clients — may have its wings clipped. And now it’s also facing the prospect of having to unload a large portion of its assets.
The lender is trying to shore up its balance sheet to avoid being seized by the Federal Deposit Insurance Corp and clear the path for a possible capital raise, the person said. It may need the US government to facilitate negotiations with some of the country’s largest banks to stabilise the lender as it executes its turnaround, the person added. That would be a much cheaper alternative than a failure of the company.
First Republic shares slumped after a plunge cut its market value in half to $1.5 billion. The bank was worth more than $22 billion at the start of March.
In addition to selling assets, the bank also plans to focus on loans that can be sold on the secondary market, it said. That’s a sharp departure from its old strategy of providing interest-only jumbo mortgages, a service that attracted legions of rich borrowers and helped build the company into a wealth-management giant.
That business is now under pressure after dozens of advisers jumped to top rivals, including Morgan Stanley, UBS Group AG and Royal Bank of Canada. It has also left analysts concerned for the future of a once-prized business that attracted clients from wealthy enclaves across the US.
First Republic had total assets of $233 billion as of March 31, including $173 billion of loans and $35 billion of investment securities, according to its first-quarter earnings report.
An asset-liability mismatch can happen when interest rates rise, forcing banks to pay depositors a higher interest rate than what they charge borrowers.
First Republic reported a bigger-than-expected drop in deposits in the first quarter. The figure declined to $104.5 billion, well below the $137 billion average of analyst estimates compiled by Bloomberg. The total included a $30 billion infusion from 11 of the largest US lenders.