Monday, May 1, 2023
Top Bidder for First Republic Bank
In the early hours of Monday morning (May 1, 2023), JP Morgan Chase (JPM), as announced by the Federal Deposit Insurance Corporation (FDIC), outbid other large U.S. banking institutions for the rights to acquire the failing First Republic Bank (FRC). Indeed, the FDIC took control of the bank on Sunday and brokered the bidding process. JPM will assume all deposits of FRC and substantially all the assets. JPM received a waiver from the FDIC to acquire FRC because JPM already holds more than 10% of U.S. deposits. The FDIC provided $50 billion in financing for JPM to facilitate the transaction. On Monday morning (May 1), FRC offices will reopen as JP Morgan Chase. JPM has stated it expects the FRC deal to be modestly accretive to EPS.
The failure of FRC marks the third bank failure this year. FRC, a commercial bank and provider of wealth management services, was the 14th largest U.S. bank by assets, with $229 billion, and the largest U.S. bank to fail since Washington Mutual in 2008. The bank was headquartered in San Francisco, CA and operated 93 offices in 11 states. The offices were primarily in California, Massachusetts, Florida, and New York.
How Will Regulators Handle The Issue?
The FDIC took an extended step to insure all deposits of the previous two bank failures this year—Silicon Valley Bank (SVB) and Signature Bank of New York (SBNY). To potentially forestall further bank runs, the FDIC stood ready to insure deposits above its official $250,000 deposit threshold. In the case of FRC, the FDIC will not have to make any special extension of its deposit insurance. As stated above, JPM has assumed all bank deposits and it is the full owner of FRC. According to JPM, customers are expected to have uninterrupted access to deposits and banking services.
LPL Research View
LPL’s view of the markets and economy is guided by The Strategic and Tactical Asset Allocation Committee (STAAC) and the senior LPL Research members within. The Committee meets weekly to analyze and discuss capital market conditions and to adjust our market views accordingly. The Committee has been monitoring bank developments since the SVB collapse and has remained cautious on bank stocks as a result. As it relates to FRC, we believe investors should react to the developments with some caution, as sentiment around bank conditions continues to be fragile.
The Committee remains “equal weight” to the financials sector relative to its weight in the S&P 500 Index. The inverted yield curve, higher deposit costs, falling earnings estimates, and the possibility of further bank failures, offset valuations in the sector, which are very low.
More broadly, we believe tactical investors should be maintaining their multi-asset allocations at or near benchmark levels. Bank sentiment headwinds and signs of an economic slowdown are near-term negatives, but we believe these developments are partially offset by the possibility that the Federal Reserve’s interest rate tightening could be near its end as inflation pressures ease.
Notably for investors looking for a potential unique opportunity, we are suggesting a tactical overweight to preferred stocks (a 3-4% position for some investors. Please consult with your financial advisor for allocations specific to your needs.). The universe for preferred stocks does include material exposure to financial institutions, and we believe it is a tactically favorable way to potentially take advantage of the bank sector distress.
For longer-term, strategic investors we believe no changes to well-balanced allocations need to be made.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
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