First Republic Bank stock tumbles on credit downgrade and deposit worries

SAN FRANCISCO -- First Republic Bank's credit rating was downgraded on Wednesday by both Fitch Ratings and S&P Global Ratings on concerns that depositors could pull their cash despite the federal intervention.

Fitch also placed another regional bank, PacWest Bancorp, on watch for a potential credit ratings downgrade of its own.

The moves reflect continued worries about the banking system in the aftermath of the collapse of Silicon Valley Bank and Signature Bank.

"We believe the risk of deposit outflows is elevated at First Republic -- despite actions by federal regulators," S&P wrote in its report.

First Republic shares tumbled 16% to session lows in midday trading following the downgrades.

Both credit ratings firms pointed to the large amount of deposits at First Republic that are uninsured because they are above the $250,000 FDIC limit.

The San Francisco-based lender has a high concentration of deposits among wealth clients in coastal markets in the United States, a characteristic that is now viewed as a "rating weakness" in today's environment.

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"This not only drives a high proportion of uninsured deposits as a percentage of total deposits but also results in deposits that can be less sticky in times of crisis or severe stress," Fitch said. "Fitch believes this feature of the business model has resulted in franchise erosion following the high profile failures of SVB Financial and Signature Bank, despite the deposit base being more diversified from a sector/industry standpoint."

From a practical standpoint, a credit ratings downgrade can make it more expensive for banks to borrow.

Both Fitch and S&P warned they could downgrade First Republic further.

First Republic announced fresh funding from the Federal Reserve and JPMorgan Chase on Sunday designed to strengthen its balance sheet. The funding means First Republic now has $70 billion in unused liquidity, cash it can use to respond to potential customer withdrawals.

"First Republic's capital and liquidity positions are very strong, and its capital remains well above the regulatory threshold for well-capitalized banks," Jim Herbert, First Republic's founder and executive chairman, and CEO Mike Roffler said in a statement on Sunday.

Moody's Investors Service on Tuesday cut its outlook for the entire US banking sector and placed six US banks on review for potential credit rating downgrades, including First Republic.