Shares of First Republic Bank are off 29% in early-morning trading as investors digest its first-quarter earnings results, which came out yesterday after the bell. The bank reported revenue and profit above analysts’ expectations, but for investors, other concerns outweighed the good results.
Chief among those concerns is a massive decline in the bank’s deposit base. Deposits help provide a foundation for banks to lend against and therefore derive net interest income on the difference collected on loaned capital and interest paid out to depositors.
Let’s take a look at how things have been at First Republic. The bank closed 2022 with $176.4 billion worth of deposits against $166.9 billion in loans, but by the end of Q1 2023, it had $104.5 billion in deposits against $173.3 billion in loans.
This massive decline in First Republic’s deposit base was triggered by the dramatic implosion of Silicon Valley Bank, which collapsed after a run on its own deposits, leaving the startup and venture capital worlds absolutely rattled.
First Republic came under pressure quickly afterward, as its customers were concerned that it might follow SVB into receivership, and saw unusually large outflows from its own deposit base. The company’s share price was decimated in the process, falling from around $115 on March 8 (when SVB announced after hours that it was making a series of financial moves, which helped precipitate the bank run) to $16 at the end of trading yesterday.
This morning, the bank’s shares are down to around $11.26 apiece.
But why are investors bearish on First Republic if its results came in better than expected and everyone had known for some time that there had been a decline in its deposit base in the wake of the SVB fiasco?
It’s the scale, it appears. Included in the company’s deposit base of $104.5 billion as of March 31, 2023, were “$30 billion of time deposits received from the large U.S. banks.” Without this well-reported deposit airdrop from large banks, First Republic’s deposit base would have fallen by something close to $100 billion in a few weeks, per TechCrunch+ calculations.
First Republic is not alone, though the scale of its outflows may be unique. Deposits at Comerica and KeyCorp, for example, also eased in the first quarter. First Republic, KeyCorp and Comerica were ranked the 14th, 20th and 37th at the end of 2022, when measured by consolidated assets, per the Federal Reserve.
If it was expected that First Republic and similar, smaller American banks would see deposit outflows thanks to SVB driving capital to larger — and seemingly more stable — banks, what has happened since the end of the first quarter?
Thanks to First Republic’s recent earnings call, we have an answer (SeekingAlpha transcript):
Total deposits as of April 21, including the $30 billion received from the large banks were $102.7 billion, down only 1.7% from the end of the first quarter. This slight decline from March 31 reflects seasonal client tax payments that occur each April.
On one hand, it’s good that deposit outflows at First Republic have slowed to a seasonal trickle. On the other, the bank has yet to show that it’s making progress toward recovering the deposit base it lost. In light of the sharp sell-off this morning, investors appear to be hewing toward the more pessimistic reading of the situation.
It’s rare for a crisis to have a single precipitating factor, but by my understanding, if SVB had not invested too much into low-yield bonds before interest rates rapidly rose, leading to large, unrealized losses on those assets, it would not have gotten into the trouble that it did. Thus, First Republic’s woes are somewhat not its fault. That doesn’t matter much in the business world, where results outweigh vibes, but it’s worth remembering.
A more sardonic reading of the overall series of events could go something like: Venture capitalists raised so much money and startups banked so much cash that their house bank tripped over its own skis trying to manage the massive influx of capital.