Morgan Stanley analysts say there is a bull case for First Republic Bank

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Morgan Stanley analysts say there is a bull case for First Republic Bank

NEW YORK - As First Republic Bank considers its options, analysts at Morgan Stanley say there is a bull case for the stock if regulators don't cover customer deposits until the banking crisis ends.

First Republic, whose shares have lost much of their value since the banking crisis began in the U.S. on March 8, has been talking to peers and investment firms about potential deals in the wake of the U.S. regulators taking over Silicon Valley Bank and Signature Bank this month.

Manan Gosalia was the analyst for Morgan Stanley, who set a target price of $54 for First Republic shares, which were down 4.4% at $15.08 on Wednesday afternoon in New York. The Federal Deposit Insurance Corporation FDIC insures all consumer deposits in a scenario that is based on the optimistic case, according to a report released on Monday.

A move by the FDIC would spur a significant rebound in the deposit base, as a majority of First Republic customers had withdrawn their money in recent weeks to put it back into the bank, according to Gosalia.

Reuters couldn't determine whether the FDIC was considering such a policy, or whether it had been requested by the lender.

Banks involved in First Republic's rescue negotiations are asking for a loss-sharing arrangement with the U.S. government similar to the terms agreed by the UBS Group in its emergency takeover of Credit Suisse, according to an industry source.

The source said that the acquirer would get support if after buying First Republic it found a larger loss than expected.

The person said that the First Republic situation needed to be resolved quickly. The deal would be made easier by a loss-sharing agreement with the government, according to the industry source.

First Republic did not respond immediately to a request for comment.

Three people familiar with the matter said that the bank is looking at ways to reduce its size if attempts to raise new capital fail.

The lender will probably have to take losses on its so-called hold to maturity portfolio even if it clinches a cash infusion, according to Morgan Stanley analysts.

A potential buyer would need to absorb losses of $26.8 billion in the Mark-to-Market from First Republic's loan and securities portfolios, while an extra $9.5 billion is needed to recapitalize the bank, according to Morgan Stanley analysts.

In the worst-case scenario, First Republic's shares would sink to just $1, according to Morgan Stanley analysts.

Citigroup put its estimates for First Republic under review and withdrew its estimates on Tuesday. Arren Cyganovich and Kaili Wang said in a report that some form of government intervention seems to be becoming more likely, albeit in a form that remains unclear. They said government intervention can take a number of forms, including a government capital infusion with some sort of make-whole to protect taxpayers.