Analysis-Asset concerns weigh on US regional banking deal negotiations According to Reuters
© Reuters. FILE PHOTO: A branch of First Republic Bank is pictured in Midtown Manhattan in New York City, New York, U.S., March 13, 2023. REUTERS/Mike Segar/File Photo
By David France
NEW YORK (Reuters) – Some U.S. regional banks’ efforts to raise capital and assuage concerns about their health are running into concerns from potential buyers and investors about impending losses. happened to their properties, five sources familiar with the discussions said.
Bank of the First Republic (NYSE:) and PacWest Bancorp are among a number of banks that have spoken to investment firms and peers about potential deals after US regulators took over Silicon Valley Bank and signature bank (NASDAQ:) this month amid a spate of depositors, sources said.
Shares of First Republic are down 80% since March 8, when the crisis began, while shares of PacWest are down 65%.
The First Republic declined to comment. PacWest did not immediately respond to a request for comment.
Five sources, who work at or with major banks and private equity firms and have reviewed such transactions, told Reuters they have decided not to participate at this time for fear that they may not be able to participate. You may experience losses in your portfolio and loan book.
They requested anonymity because they are not authorized to discuss confidential discussions publicly.
Portfolios where regional banks place customer deposits consist mainly of Treasury bonds and other securities, such as mortgage bonds.
They are worth less than the banks assess on their books due to the sharp increase in interest rates. Some of these banks’ loan books are also submerged due to high interest rates and fears of an economic downturn.
Sources said they were reluctant to enter into these deals without government support for losses or a more favorable outlook on interest rates.
Reuters could not determine whether any banking regulators had been asked by the suitors to prevent portfolio losses and whether they did so.
The Federal Deposit Insurance Corporation (FDIC), the deposit insurer and receivership manager, has told banks it is considering offers in auctions for Silicon Valley Bank and Signature Bank on Friday that it was considering withholding some of the assets lying underwater for failed lenders. However, such a backstop is usually reserved for banks taken over by the FDIC.
A spokesman for the FDIC did not respond to a request for comment.
Credit rating agency Moody’s (NYSE:) Investors Service Inc estimated on Friday that First Republic’s unrealized losses in its portfolio amounted to 37.7% of the cash and stock the company set aside to offset. losses and warned that it would also be difficult to sell some of his home mortgage loans without incurring a loss.
“The crystallization of such losses, if occurred, would have a huge impact on the bank’s profitability and capital,” Moody’s said.
A banking executive who researched a deal with First Republic estimates that ticking the California-based bank’s mortgage book market in an acquisition would cause a big hit for the bank. buyer.
The government would have to facilitate such a deal, the executive said. It could do so, the executive added, by providing some time frame for a buyer’s leverage to determine the bank’s debt level or prevent it in other ways. The CEO is not aware of any such discussions.
Another complication in cutting deals with regional banks is uncertainty about the interest rate outlook, said a lawyer who works on banking-related transactions.
The Federal Reserve will decide on Wednesday whether it will raise interest rates further in its fight against inflation. Lawyers say those studying the transactions and trying to gauge the future value of banks in the region are hoping for clarity on how aggressive the central bank is in raising interest rates. more capacity.
It’s not clear how long some regional banks can hang around without a deal.
While new liquidity support measures created by the US Treasury and regulators last Sunday are helping the region’s banks stay afloat, banking analysts said. The crisis has reduced their profitability and made it difficult to do business as usual.
Bank of America (NYSE: NYSE) analysts wrote in a research note on Friday that the $30 billion in deposits that major First Republic peers moved in solidarity with the bank Struggling clients have helped stabilize its funding base but haven’t been very profitable for it due to some of its clients.
In addition to the accounting mark, the final value a potential buyer is willing to pay will also be influenced by their assessment of the diminution potential for a customer’s franchise, the analysts wrote. most of the Republic”.