- We believe that First Republic Bank's deposit flows have been volatile following the government's closure of two banks in the past week.
- Consequently, we expect the bank to increase wholesale borrowings to shore up its on-balance-sheet liquidity, which would likely weigh on its already modest profitability.
- We placed our ratings on First Republic Bank on CreditWatch with negative implications.
- The CreditWatch negative reflects the potential for First Republic's funding profile, revenue stability, and profitability to deteriorate.
On March 14, 2023, S&P Global Ratings placed its 'A-' long-term issuer credit rating on First Republic Bank on CreditWatch with negative implications. We also placed our ratings on First Republic's senior unsecured debt, subordinated debt, and preferred stock on CreditWatch with negative implications.
Recent actions by federal bank regulators provide U.S. banks with better access to liquidity, but we think First Republic's deposit levels may be volatile because of its more concentrated deposit base. The Federal Reserve Board announced on March 12 certain emergency liquidity measures, including the creation of the Bank Term Funding Program (BTFP) and an easing of terms offered through the discount window. Although financial markets have stabilized somewhat following this announcement, we believe First Republic's deposit profile may remain volatile, necessitating increased usage of more costly contingent liquidity.
First Republic has over $70 billion in contingent borrowing availability to meet liquidity needs. On March 12, First Republic announced that its unused contingent liquidity sources increased to over $70 billion, consisting of borrowing capacity from the Federal Reserve, Federal Home Loan Bank (FHLB) of San Francisco, and additional financing from J.P. Morgan Chase & Co. This unused availability does not include capacity through the Federal Reserve's BTFP. We expect increased usage of wholesale funding will encumber First Republic's balance sheet and reduce its financial flexibility. As a result, funding metrics may weaken relative to peers, and we expect the ratio of loans to deposits--already high at 95% as of year-end 2022--may rise above 100%. In addition, First Republic's already modest profitability due to its loan portfolio being heavily weighted toward long-duration residential mortgages--which have fallen in fair value as interest rates have rapidly increased--may be hurt by the higher costs associated with the incremental wholesale funding.
The CreditWatch negative reflects the potential for First Republic's funding profile, revenue stability, and profitability to deteriorate, given our expectation of higher wholesale funding usage as the bank addresses deposit volatility.
We could lower our ratings on First Republic by one notch or more if:
- Sustained deposit outflows erode liquidity, perhaps because of further market instability;
- Borrowings increase materially, decreasing contingent liquidity and encumbering its balance sheet;
- The bank is forced to rely heavily on the BTFP or other government funding support; or
- Other asset quality, financial, or operational issues arise because of elevated market contagion risk.
We could resolve the CreditWatch with no rating changes if:
- Deposit levels remain stable and wholesale funding needs are significantly less than we currently anticipate.
ESG credit indicators: E-2, S-2, G-2
- General Criteria: Hybrid Capital: Methodology And Assumptions, March 2, 2022
- Criteria | Financial Institutions | Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Dec. 9, 2021
- Criteria | Financial Institutions | General: Financial Institutions Rating Methodology, Dec. 9, 2021
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Financial Institutions | General: Risk-Adjusted Capital Framework Methodology, July 20, 2017
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
- The Fed's Plan For U.S. Banks Should Reduce Contagion Risk, March 13, 2023
|Ratings Affirmed; CreditWatch/Outlook Action|
First Republic Bank
|Issuer Credit Rating||A-/Watch Neg/--||A-/Stable/--|
First Republic Bank
|Senior Unsecured||A-/Watch Neg||A-|
|Preferred Stock||BBB-/Watch Neg||BBB-|
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
|Primary Credit Analyst:||Nicholas J Wetzel, CFA, Englewood + 303-721-4448;|
|Secondary Contact:||Rian M Pressman, CFA, New York + 1 (212) 438 2574;|
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