First Republic 'unlikely' to survive: Analyst
First Republic shares plummeted over growing concerns about the bank's chances of survival. "They need to do the mother of all pivots" to survive, says Timothy Coffey of Janney Montgomery Scott. The analyst says the bank needs to shrink its balance sheet, but their assets are no longer worth what they once were, making a sale "a tough pill for a buyer to swallow."
When asked about a CNBC report that First Republic (FRC) is likely headed for FDIC receivership, Coffey says it is "unlikely" the bank will survive. "Unless there's an asset sale and a follow-on equity raise to support their own capital levels, make up for the losses that they would incur on the sale of the assets, it's unlikely," Coffey told Yahoo Finance's Julie Hyman and Diane King Hall.
Key video moments
00:00:08 First Republic needs "to do the mother of all pivots"
00:01:11 What it will take for First Republic to survive
Video Transcript
TIMOTHY COFFEY: There has been a certain number of challenges for First Republic that have become public since they released earnings on Monday. And one of them is that they need to sell assets. I think we had written a report on Tuesday saying they needed to do the mother of all pivots. And one of the things they needed to do was shrink the balance sheet. And what they have on there, not really much of a credit risk, right? We're talking residential mortgages, high net worth people, and government securities.
The issue is that the current market value of those assets are lower than when they were originated. And that gap shows up as a mark on the loans. And whoever would buy the loans or the securities then has to inherit that gap in their equity. And the issue with that is, in an environment where banks are being encouraged to maintain capital levels or grow capital levels into a potentially softening economic environment, it's a tough pill for a buyer to swallow and take on those loans while fully knowing well that they're going to be lowering their own capital ratios.
- Tim, so as we know, CNBC reporting that First Republic likely headed to FDIC receivership. Can First Republic survive?
TIMOTHY COFFEY: Well, unless there's an asset sale and a follow on equity raise to support their own capital levels, make up for the losses that they would incur on the sale of the assets, it's unlikely. It's unlikely. And, you know, based on all the reporting, the things I'm hearing as well, that there is that standstill between what First Republic believes they need to sell the assets at in order to survive and what a buyer is willing to buy them at. And so far, they're not closing that gap in a fast enough manner, unfortunately.
