First Republic Bank Reassures Clients Amid Fears of Banking Industry Contagion

Dear readers,

Last week's collapse of Silicon Valley Bank has sparked fears of contagion in the banking industry. First Republic Bank (FRC -14.84%) was one of the banks that saw its stock price decline amid concerns about the safety of its business. However, in a letter to clients posted on its website, First Republic's Chairman Jim Herbert and CEO Mike Roffler sought to reassure clients about the safety and stability of the bank. They highlighted the continued strength of the bank's capital, liquidity, and operations.

The letter also revealed that First Republic's capital levels are "significantly higher" than regulatory requirements, and its liquidity is "strong." The bank has access to $60 billion of unused borrowing capacity at the Federal Home Loan Bank and the Federal Reserve Bank.

Despite these reassurances, investors remain concerned about the concentrated, well-heeled, deposit base of First Republic. Some worry that these customers might look to move their savings into higher-yielding products, eroding a low-cost source of funding for the bank.

Analysts, however, are more optimistic. While acknowledging the challenges facing First Republic, they stress that comparisons to Silicon Valley Bank are overblown. Venture capital and private equity deposits accounted for only 8% of First Republic's business, compared to 52% of Silicon Valley Bank's deposit base. Additionally, First Republic's available-for-sale portfolio was only 1.7% of earning assets at the bank, compared to 14% at Silicon Valley Bank.

While there are concerns about the narrowing net interest margin (NIM) in the current climate of rising rates, analysts emphasize that NIM pinches aren't the same as business model/strategic/balance sheet management issues.

Overall, while the continuing uncertainty around the industry has driven elevated near-term risk for bank stocks, analysts believe that First Republic is far less exposed to the most acute and idiosyncratic pressures that are impacting certain banks today.

While First Republic may not have an easy path ahead, Wall Street is hoping cooler heads prevail.

Thank you for reading.