First Republic Bank (NYSE: FRC) was up 12% yesterday on anticipation of its earnings report - then down 22% as that report was digested. The earnings themselves looked fine enough, revenues $80 million ahead of expectations, an earnings beat of 70 cents a share, over those expectations again. But earnings in a bank are manipulable - hmm, perhaps it's possible to manage them is better. At least over the short term it's entirely so. So, earnings aren't quite what is being looked at here at First Republic. Rather, it's the deposit base that is worrying people.
There's been an outflow of $102 billion in those deposits. Now, we know, modern monetary theory insists that banks don't lend out deposits and all that. But a bank must finance, at least, its lending with deposits. So, if deposits are fleeing then the bank must shrink its asset base - the lending it has done. Sure, it's possible to fill the gap with “hot money” from the markets but they'll charge a higher interest rate. That compresses margins and leads to much the same position. The adjusted net interest margin is down from 2.45% last quarter to 1.66% this. This is an effect of losing the low cost uninsured deposits.
First Republi9c Bank share price from NASDAQ
The management sees what is happening here and is going to cut costs, cut their own salaries and so on. So it's not people blindly walking off a cliff. But banking always is that confidence trick. At present the Feds aren't going to let a bank fall over and cost depositors their money - insured or not. But people are worrying, they are moving deposits out of this bank they feel might be risky. That movement, in itself, is the thing that makes FRC risky. That's what the confidence fairy is about - if people lose confidence in a bank and the security of their deposits then that's that for the bank, even if everything else is absolutely fine.
Now, it's not obvious that this will continue. It might well be that First Republic can turn around that deposit flow and thus survive, even thrive. But if it can't then the end will be swift. For the Feds would come in and solve it, not leave it to deteriorate in public.
