by By David French
NEW YORK (Reuters) – Efforts by some regional U.S. banks to raise capital and allay fears about their health are facing concerns from potential buyers and investors about imminent losses on their assets, five sources with knowledge of the discussions said.
First Republic Bank and PacWest Bancorp are among banks that have been talking to peers and investment firms about possible deals after U.S. regulators took control of Silicon Valley Bank and Signature Bank this month amid a depositor flight, sources said.
First Republic shares are down 80% since March 8, when the crisis began, while PacWest shares are down 65%.
The First Republic declined to comment. PacWest did not immediately respond to a request for comment.
The five sources, who work at or with large banks and private equity firms and have reviewed such deals, told Reuters they had decided not to participate for now out of fear of being hit with losses on investment portfolios and loan portfolios.
They requested anonymity because they were not authorized to publicly discuss the confidential deliberations.
The investment portfolios where regional banks deposit their customers’ deposits are mainly composed of Treasury bills and other securities such as mortgage bonds.
They are worth less than the banks value on their books because of a sharp rise in interest rates. Some of these banks’ loan portfolios are also submerged, due to high rates and concerns about an economic slowdown.
The sources said they were reluctant to participate in these deals without government backing for losses or a more favorable outlook for interest rates.
Reuters was unable to determine whether some bank regulators were asked by claimants to support portfolio losses and whether they would do so.
The Federal Deposit Insurance Corporation (FDIC), which insures deposits and administers foreclosures, told banks evaluating bids at Silicon Valley Bank and Signature Bank auctions on Friday that it was considering retaining some of the assets that are buried in failed creditors. . That backstop, however, is normally reserved for banks acquired by the FDIC.
An FDIC spokesman did not respond to a request for comment.
BIG LOSSES
Credit rating agency Moody’s Investors Service Inc estimated on Friday that unrealized losses on First Republic’s investment portfolio accounted for 37.7% of the cash and stock it had set aside to absorb losses and warned that it would also be difficult to sell some of your lossless home mortgage loans. .
“Such a crystallization of losses, if it happened, would weigh heavily on the bank’s profitability and capital,” Moody’s said.
A banking executive who studied a deal with First Republic estimated that marking to market the Californian bank’s mortgage portfolio in an acquisition would spell a big hit for the acquirer.
The government would have to facilitate such an agreement, the executive said. It could do so by providing some leeway to the acquirer’s leverage ratios that determine the bank’s debt levels, or by supporting it in other ways, the executive added. The executive was not aware of such discussions.
Another complication in settling with regional banks is uncertainty about the interest rate outlook, said a lawyer who works on bank transactions.
The Federal Reserve will decide on Wednesday whether to raise rates further in its battle with inflation. Those studying deals and trying to gauge the future value of regional banks are hoping for clarity on how aggressively the central bank will move to raise rates further, the lawyer said.
CHANGING THROUGH
It’s not clear how long some regional banks can go on without a deal.
While new liquidity bailouts created by the US Treasury and regulators last Sunday are keeping regional banks afloat, the crisis has eviscerated their profitability and made it difficult to continue business as usual, bank analysts say.
Bank of America analysts wrote in a research note on Friday that the $30 billion in deposits that First Republic’s major peers moved in solidarity with the troubled bank helped stabilize its funding base but did little for its earnings. due to the flight of some of its customers.
“In addition to the accounting markup, the final amount a potential buyer will be willing to pay will also be influenced by their assessment of the potential damage to the First Republic client’s franchise,” the analysts wrote.
(Reporting by David French in New York; Additional reporting by Anirban Sen and Lananh Nguyen in New York and Pete Schroeder in Washington, DC; Editing by Greg Roumeliotis and Jacqueline Wong)
