A bull case scenario for the shares of the First Republic Bank as it considers its options became more difficult on Wednesday after Treasury Secretary Janet Yellen said there was no discussion on insurance for all bank deposits without approval from the US Congress.
First Republic, whose shares have lost value since the banking crisis started in the US on March 8, is talking to peers and investment firms about possible deals in the wake of the US regulators taking over Silicon Valley Bank and Signature Bank.
In a report earlier this week, Morgan Stanley analyst Manan Gosalia set a target price of $54 for First Republic shares in a best-case scenario. The Federal Deposit Insurance Corp FDIC has insures all consumer deposits through the end of the banking crisis, leading to a return of the majority of customer deposits, according to the report.
After Yellen told the Senate Appropriations Subcommittee on Financial Services on Wednesday, that hope was reduced because she was not considering such a move without congressional approval and was reviewing bank risks on a case-by-case basis.
She said she had not considered or talked about anything related to blanket insurance or guarantees of deposits.
She said that the Treasury and regulators had a resolute commitment to safeguard deposits of smaller institutions, including community banks.
The latest remarks affected all regional bank stocks, said R.J. Grant, head of trading at Keefe, Bruyette Woods.
For sure, Yellen struck a different tone. There was a feeling that depositors would be protected because of the behind-the-scenes talks in Washington, Grant said.
On Wednesday, JPMorgan Chief Executive Jamie Dimon met with Lael Brainard, director of the White House's National Economic Council, during a planned trip to Washington, according to a person familiar with the situation. It came as First Republic's efforts to secure capital infusion continued.
A potential extension of FDIC insurance could bring back a majority of First Republic customers, according to the Morgan Stanley report. The banks involved in First Republic's rescue negotiations want a loss-sharing arrangement with the US government, similar to the terms agreed by Switzerland's UBS Group in its emergency takeover of rival Credit Suisse, according to an industry source.
The source said the acquirer would get support if it found a larger loss than expected after buying First Republic.
Three people familiar with the matter told the bank that it is looking at ways to reduce its size if attempts to raise new capital fail.
Even if itclinches a cash infusion, the lender will probably have to take losses on securities in its so-called hold-to maturity portfolio, according to Morgan Stanley analysts.
A potential buyer would need to absorb $26.8 billion in mark-to- market losses 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 the stock under review after it withdrew its estimates for First Republic on Tuesday. Analysts Arren Cyganovich and Kaili Wang said in a report that some form of government intervention seems increasingly likely, albeit in a form that remains unclear.