First Republic Bank, a US-based bank, has had its credit rating downgraded to junk by Moody’s Investors Service. Moody’s cited the bank’s deteriorating financial profile due to its increased reliance on short-term and higher cost wholesale funding as a reason for the downgrade. This comes after Fitch Ratings and S&P Global Ratings also downgraded the bank’s debt earlier in the week. First Republic is reportedly seeking to raise money from other banks or private-equity firms through the sale of additional shares. Shares of the bank have lost 80% of their value since March 8 and plummeted a further 33% in Friday’s session.
Important Details about First Republic Bank’s debt cut to junk by Moody’s –
– Moody’s downgraded First Republic Bank’s credit rating to junk due to deterioration in its financial profile.
– First Republic’s debt rating was cut to B2 from Baa1.
– Fitch Ratings and S&P Global Ratings also downgraded the bank’s debt earlier this week.
– The downgrade reflects the bank’s increased reliance on short-term and higher cost wholesale funding due to deposit outflows, according to Moody’s.
– Moody’s cited various recent developments, including the bank’s disclosure that its Federal Reserve borrowings ranged from $20 billion to $109 billion over the previous week.
– The high cost of these borrowings, combined with the bank’s high proportion of fixed rate assets, is likely to have a negative impact on First Republic’s core profitability in the coming quarters, according to Moody’s.
– First Republic is reportedly looking to raise money from other banks or private-equity firms by selling additional shares.
– Shares of the company have plunged 80% from the close of trading on March 8, just before Silicon Valley Bank spooked investors with an update on its business and a planned stock sale.
– Moody’s outlook was maintained at “rating under review.”
Moody’s Downgrades First Republic Bank’s Credit Rating to Junk Due to Financial Deterioration
Moody’s Investors Service lowered First Republic Bank’s credit rating to junk status late Friday, citing a “deterioration in the bank’s financial profile.” First Republic’s debt rating was cut to B2 from Baa1, while Fitch Ratings and S&P Global Ratings had already downgraded the bank’s debt earlier in the week.
Moody’s analysts explained that the downgrade reflects “the deterioration in the bank’s financial profile and the significant challenges First Republic Bank faces over the medium term in light of its increased reliance on short-term and higher cost wholesale funding due to deposit outflows.”
Various recent developments with First Republic were cited, including the company’s disclosure that, over the previous week, its Federal Reserve borrowings ranged from $20 billion to $109 billion. Moreover, on the same day, the bank received a $30 billion deposit infusion from 11 major US banks. Moody’s analysts believe the high cost of these borrowings, combined with the high proportion of fixed-rate assets at the bank, is likely to have a large negative impact on First Republic’s core profitability in the coming quarters. Additionally, the rating agency noted that while the news of the banking consortium’s deposits is positive in the short run, the longer-run path for the bank’s sustained profitability remains uncertain.
According to reports, First Republic is seeking to raise funds from other banks or private-equity firms by selling additional shares. Shares of the company have plunged 80% since the close of trading on March 8, just before Silicon Valley Bank spooked investors with an update on its business and a planned stock sale. First Republic Bank lost 33% in Friday’s session despite the deposit arrangement with the large banks. Shares were down another 6% in the extended session Friday.
Moody’s maintained its outlook at “rating under review,” reflecting its continuing challenges to the bank’s medium-term credit profile due to its significantly eroded deposit base, increased reliance on short-term wholesale funding, and sizeable volume of unrealized losses on its investment securities.
Deteriorating Financial Profile
Moody’s points out that First Republic Bank’s financial profile has deteriorated, leading to a lower credit rating. Several factors contribute to this deterioration, including the bank’s increased reliance on short-term wholesale funding, which is tied to volatile market conditions that can result from changes in the company’s underlying assets’ valuations.
The bank’s lack of diversification in its asset mix also means that it’s more exposed to changes in market conditions. Should market risks materialize, First Republic would be more affected than its peers who have diversified portfolios that have less direct exposure to its particular mix of fixed-income assets and securities.
First Republic Bank’s profitability is also in question, with Moody’s suggesting that the high cost of borrowing combined with its fixed-rate assets is likely to have a significant negative impact on its core profitability in coming quarters. Given the size of the bank’s unrealized losses on investment securities, its path back to sustained profitability remains uncertain.
Deposit Outflows
Another significant factor contributing to the bank’s deteriorating financial profile is deposit outflows. Over the last week, First Republic Bank disclosed that its Federal Reserve borrowings ranged from $20 billion to $109 billion. While the bank received a $30 billion infusion of deposits from 11 major US banks, the news is positive in the short term, but the longer-term path to sustained profitability remains uncertain.
The bank’s reliance on short-term and high-cost wholesale funding due to deposit outflows further exacerbates matters. In attempting to secure additional funding, First Republic is seeking to raise money through selling additional shares to other banks or private-equity firms.
Impact on the Stock Market
First Republic Bank’s plummeting stock value reflects the wider impact on the stock market when a company endures financial difficulty. Shares of the company have plunged 80% from the close of trading on March 8, just before Silicon Valley Bank spooked investors with an update on its business and a planned stock sale. First Republic lost 33% in Friday’s session despite its deposit arrangement with the large banks. Shares were down another 6% in the extended session Friday.
Conclusion
In conclusion, the downgrade of First Republic Bank’s credit rating to junk status is due to its deteriorating financial profile, as Moody’s pointed out. The continued challenges to the bank’s medium-term credit profile reflect its significantly eroded deposit base, increased reliance on short-term wholesale funding, and sizable volume of unrealized losses on its investment securities. While the news of the banking consortium’s deposit infusion is positive in the short term, there remains uncertainty regarding the bank’s stock value in the long term, given the lack of diversification in its asset mix, and the challenges to its profitability arising from the high cost of borrowing and its fixed-rate assets.