Asset analysis concerns weigh on negotiations for US regional bank deals
By David French
NEW YORK (Reuters) – Efforts by some U.S. regional banks to raise capital and allay fears about their health are sparking concerns from potential buyers and investors about impending losses in their assets, five sources with knowledge of the discussions said.
First Republic Bank and PacWest Bancorp are among banks that have been talking to rivals and investment firms about possible deals after US regulators took over Silicon Valley Bank and Signature Bank this month amid a flight of depositors, sources said.
First Republic shares are down 80% since March 8, when the crisis began, while PacWest shares are down 65%.
First Republic declined to comment. PacWest did not immediately respond to a request for comment.
The five sources, who work at or with big banks and private equity firms and have investigated such deals, told Reuters they have decided not to participate for now for fear they could be hit by losses in investment portfolios and loan books become.
They asked for anonymity as they were not authorized to discuss the confidential deliberations publicly.
The investment portfolios in which the Landesbanken have parked their customers’ deposits consist mainly of treasuries and other securities such as mortgage bonds.
They are worth less than the banks value them on their books because interest rates have risen sharply. Some of these banks’ loan books are also under water due to high interest rates and concerns about an economic slowdown.
The sources said they were reluctant to take part in the deals without the government absorbing losses or a more benign interest rate outlook.
Reuters could not determine whether bank regulators had been asked by applicants to recover the portfolio losses and whether they would do so.
The Federal Deposit Insurance Corporation (FDIC), which insures deposits and administers receiverships, told banks considering bids in Friday’s auctions for Silicon Valley Bank and Signature Bank that it was considering selling some of the assets at the failed lenders are under water. However, such a backstop is typically reserved for banks that have been acquired by the FDIC.
An FDIC spokesman did not respond to a request for comment.
Rating agency Moody’s Investors Service Inc. on Friday estimated that unrealized losses in First Republic’s investment portfolio accounted for 37.7% of the cash and stocks it set aside to absorb losses, and warned it would also struggle to service some of its mortgage loans for residential property to sell with no loss .
“Such a build-up of losses, if it were to occur, would weigh heavily on the bank’s profitability and capital,” Moody’s said.
A bank executive investigating a deal with First Republic estimated that the market valuation of the California bank’s mortgage book would spell a big win for the acquirer in a takeover.
The government would have to facilitate such a deal, the executive said. It could do so by giving some leeway to the acquirer’s leverage ratios, which determine the bank’s leverage, or otherwise prop them up, the executive added. The executive was not aware of such conversations.
Another complication of doing a deal with regional banks is uncertainty about the interest rate outlook, said a lawyer who works on transactions with banks.
The Federal Reserve will decide on Wednesday whether to raise interest rates further to fight inflation. Those examining deals and trying to gauge the future value of regional banks are hoping for clarity on how aggressively the central bank will move to continue raising rates, the lawyer said.
It is unclear how long some regional banks can muddle through without a deal.
While new liquidity backstops created last Sunday by the US Treasury and regulators are keeping regional banks afloat, the crisis has eroded 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 First Republic’s key competitors moved in solidarity with the struggling bank helped stabilize their funding base, but amid the flight of some of theirs customers did little for their profits.
“Beyond the billing mark, the ultimate value that a potential buyer is willing to pay will also be influenced by their assessment of the potential impact on First Republic’s customer business,” 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)