First Republic Bank shares fall on credit downgrade, deposit worries

First Republic Bank's credit rating was downgraded on March 15 by both Fitch Ratings and S&P Global Ratings due to concerns that depositors could withdraw their money despite federal intervention.

Matt Egan, CNN

First Republic Bank’s credit rating was downgraded on Wednesday by both Fitch Ratings and S&P Global Ratings on concerns that savers could withdraw their money despite federal intervention.

Fitch has also placed another regional bank, PacWest Bancorp, on standby for a possible downgrade of its own credit rating.

These moves reflect ongoing concerns about the banking system following the collapse of Silicon Valley Bank and Signature Bank.

“We believe that the risk of deposit outflows in the First Republic is increased, despite the actions of federal regulators,” S&P said in a report.

Shares of First Republic fell 16% to session lows at noon after the downgrade.

Both rating companies pointed to a large number of uninsured deposits with First Republic as they exceed the $250,000 FDIC limit.

The San Francisco-based lender has a high concentration of deposits among wealthy clients in coastal markets in the United States, which is currently seen as “rating weakness” in today’s environment.

“Not only does this result in a high share of uninsured deposits as a percentage of total deposits, but it also means that deposits can be less sticky during times of crisis or high stress,” Fitch notes. “Fitch believes that this feature of the business model has led to the erosion of the franchise following the high-profile bankruptcies of SVB Financial and Signature Bank, despite the fact that the deposit base was more diversified in terms of sector/industry.”

From a practical standpoint, a credit downgrade could make loans more expensive for banks.

Both Fitch and S&P warned that they could downgrade First Republic further.

On Sunday, First Republic announced new funding from the Federal Reserve and JPMorgan Chase aimed at bolstering its balance sheet. The funding means that First Republic now has $70 billion of unused liquidity, cash it can use to respond to potential customer withdrawals.

“First Republic’s capital and liquidity positions are very strong, and its capital remains well above the regulatory threshold for well-capitalized banks,” Jim Herbert, First Republic founder and executive chairman and CEO Mike Roffler, said in a statement Sunday.

Moody’s Investors Service cut its outlook for the entire US banking sector on Tuesday and placed six US banks on review for potential credit rating downgrades, including First Republic.

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Shares of the First Republican Bank fell due to the downgrade of the credit rating, and concerns about deposits first appeared on KION546.

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