First Republic Bank’s shares jump despite deposits dropping by over $100B

First Republic Bank revealed that its deposits dropped by over $100 billion during the first quarter of 2023 as the lender explored options to restructure its balance sheet. Despite the significant decline in deposits, the bank’s profits surpassed expectations.

First Republic Bank deposits drop by over $100B in the first quarter

First Republic Bank plans to reduce its balance sheet and lower expenses by slashing executive compensation and laying off between 20% and 25% of employees during the second quarter. The company also plans to raise the amount of insured deposits and reduce borrowing from the Federal Reserve Bank.

The bank is also exploring strategic options to speed up the process of strengthening the bank’s financial position. However, the institution did not disclose any details. The lender is exploring all the available options.

A source close to the bank informed Reuters that the bank was looking for help from the US government to bring parties that will play a major role in shoring up confidence in the bank. Such parties include large lenders and private equity companies.

First Republic Bank came under stress following the collapse of Silicon Valley Bank and Signature Bank last month. The collapse of the two lenders dampened confidence in the US banking industry, leading to customers transferring deposits from smaller banks to large institutions.

The finance chief at First Republic Bank, Neal Holland, said that the bank witnessed unprecedented deposit outflows after the closure of several banks in March. During the first quarter, deposits declined to $104.47 billion from the $176.43 billion recorded during the fourth quarter. The deposits plunged despite the bank receiving a $30 billion lifeline from some of the largest banking institutions in the US.

First Republic Bank faces a tough year

First Republic Bank is facing a tough time reviving its financial position. Over the years, the bank has lured high-net-worth clients using preferential rates on loans and mortgages, making it vulnerable compared to other regional lenders that do not have a wealthy clientele base.

The bank has limited choices in terms of selling assets. If it chooses to divest the mortgage division, it will likely lead to losses. On the other hand, selling the wealth management division will eliminate one of the most lucrative businesses at the bank.

First Republic Bank is also exploring downsizing if the efforts made to raise new capital fail to materialize. On Monday, Moody downgraded the bank’s stock alongside the stock of other banks. First Republic Bank’s stock was downgraded by three notches, and it was more severe than its peers, such as Western Alliance Bancorp and US Bancorp.

Investors have been analyzing the Q1 2023 financial results from several regional banks in the US to determine their health and ability to withstand future financial shocks. Some of the largest banks in the US recorded profits during the quarter because of high interest-rate payments during the period.