Analysis-Asset concerns weigh on deal talks with US regional banks

By David French

NEW YORK (Reuters) – Efforts by some U.S. regional banks to raise capital and ease fears over their health are being hit by concerns from potential buyers and investors about impending losses to their assets, five sources with knowledge of them said. discussions.

First Republic Bank and PacWest Bancorp are among banks that spoke to peers and investment firms about potential deals following US regulators’ takeover of Silicon Valley Bank and Signature Bank this month in amid a leak of depositors, sources said.

First Republic shares have fallen 80% since March 8, when the crisis began, while shares of PacWest have fallen 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 major banks and private equity firms and have reviewed such transactions, told Reuters they had decided not to participate for the time being for fear of suffering portfolio losses. investment and loan books.

They requested anonymity because they were not authorized to publicly discuss confidential deliberations.

The investment portfolios where regional banks have parked their customers’ deposits mainly include treasury bills and other securities, such as mortgage bonds.

They are worth less than the banks value them on their books due to a sharp rise in interest rates. Some of these banks’ loan portfolios are also underwater, due to high rates and worries about an economic downturn.

The sources said they were reluctant to participate in such deals without government support on losses or a more favorable interest rate outlook.

Reuters could not determine if any banking regulators had been asked by suitors to support portfolio losses and if they would.

The Federal Deposit Insurance Corporation (FDIC), which insures deposits and manages receiverships, told banks considering bids in the auction for Silicon Valley Bank and Signature Bank on Friday that it plans to keep some of the assets that are underwater among defaulting lenders. Such a safety net, however, is usually reserved for FDIC repossessed banks.

An FDIC spokesperson did not respond to a request for comment.


Credit rating agency Moody’s Investors Service Inc estimated on Friday that unrealized losses on First Republic’s investment portfolio amounted to 37.7% of the cash and stocks it had set aside to absorb losses and warned that it would also be difficult to sell some of its residential mortgages without a loss. .

“Such a crystallization of losses, if it were to occur, would weigh very significantly on the bank’s profitability and capital,” Moody’s said.

A banking executive who studied a deal with First Republic said adding value to the California bank’s mortgage portfolio in an acquisition would be a big win for the acquirer.

The government should facilitate such an agreement, the executive said. It could do so by giving some leeway to the acquirer’s leverage ratios that determine the bank’s leverage levels, or by supporting it in some other way, the executive added. The executive was unaware of such discussions.

Another complication in reaching a deal with regional banks is uncertainty over the outlook for interest rates, said a lawyer who works on transactions involving banks.

The Federal Reserve will decide on Wednesday whether to raise rates further in its fight against inflation. Those studying the transactions and trying to assess the future value of regional banks are hoping for clarity on how aggressively the central bank will act to raise rates further, the lawyer said.


It’s unclear how long some regional banks can get by without a deal.

While new safety nets created by the US Treasury and regulators last Sunday are keeping regional banks afloat, the crisis has gutted their profitability and made it difficult to continue the status quo, banking analysts say.

Bank of America analysts wrote in a research note on Friday that the $30 billion in deposits that major First Republic peers moved in solidarity with the troubled bank helped stabilize its funding base, but n haven’t done much for its revenue given the flight of some of its customers.

“Beyond the book mark, the ultimate value a potential buyer will be willing to pay will also be influenced by their assessment of the potential depreciation of the First Republic client 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)

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