First Republic Bank was downgraded to junk by S&P Global Ratings and Fitch Ratings amid concerns that customers will pull their holdings from the lender, even after US regulators pledged to support the banking sector.
The Bank of California’s credit rating was downgraded to BB+ from A-, and remains negative on credit watch, according to an S&P statement on Wednesday. Shortly after, Fitch cut the bank to BB from A-, a step below S&P’s rating, and placed it under negative rating watch.
Both creditors said more cuts are possible as First Republic faces deposit outflows that could affect liquidity and increase wholesale borrowing.
Analysts Nicholas Wetzel and Ryan Pressman wrote: “The commercial bank’s position will be affected after the volatile swings in its stock prices and the increased media attention to the volatility of deposits.” “The stability of its business has weakened as market perceptions of its creditworthiness have declined.”
First Republic shares fell as much as 26% on Wednesday, with other regional banks also dropping in another volatile day of trading. First Republic pared the decline for the day, closing at $31.16 a share, down 21.4%.
A First Republic Bank spokesman declined to comment.
The downgrades from two major credit rating firms officially move the bank into the high-yield market, a rating rare for financial institutions. Moody’s Investors Service Developed The bank – along with five other lenders – was under review for a downgrade earlier in the week.
S&P expects the lender to ramp up wholesale financing in the wake of the collapses at Silvergate Capital, SVB Financial Group’s Silicon Valley bank and Signature Bank. Analysts wrote that the move would hit both interest margin and profitability. Silicon Valley Bank was downgraded and pulled down by S&P after Federal Deposit Insurance Corp. acquired the lender.
“First Republic’s overall profitability is more weighted toward net interest income than most comparable regional banks, since fee income (mostly wealth management-related fees) is less than 20% of gross profit,” they wrote.
Meanwhile, Fitch said the bank’s municipal bond positioning and deposit base focused on “wealthy and financially sophisticated clients” also constrained the rating.
“The lender’s deposit concentrations are now seen as a rating weakness,” Fitch Analysts Johann Mueller and Michael Shepherd wrote in a statement on Wednesday.
How seriously the rating agency will downgrade it by retail consumers is another matter. The agencies rated both SVB and First Republic investment grade until it was too late, depositors started fleeing and share prices collapsed.
The cuts were necessary, said Francine McKenna, who teaches at the Wharton School of Business and publishes a newsletter called Dig, but the question is whether they did it soon enough to get people to understand what was happening and make a decision, or was it just to cover ass? “
After the collapse of the SVB, US regulators put in place an emergency package of support for financial institutions, designed to prevent any further failures.
Given the severe political ramifications that could unfold should the government not meet its obligations, financial advisors say there’s probably no reason to worry whether your insured money is parked at Silicon Valley Bank, First Republic Bank, or anywhere else covered by the FDIC.
“As long as you take care of your personal support matters and your questions and keep your deposits under $250,000, I would feel very confident in the system,” said Andrew Hovarth of wealth management firm Financial Alternatives in La Jolla.
Mitchell writes for the Los Angeles Times and Joshua writes for Bloomberg.
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