First Republic Bank Cut to Junk by S&P on Deposit Outflow Risk

(Bloomberg) — First Republic Bank was cut to junk by S&P Global Ratings amid concern that clients pull holdings from the lender, a move that comes after US regulators pledged support for the banking sector.

Most Read from Bloomberg

The California-based bank’s credit rating was lowered to BB+ from A-, and it remains on credit watch negative, according to an S&P statement Wednesday. Further downgrades are possible as the credit assessor cited risks around additional deposit outflows, despite recent moves by the bank to boost its borrowing capacity.

“The bank’s business position will suffer after the volatile swings in its stock price and heightened media attention surrounding deposit volatility,” S&P analysts Nicholas Wetzel and Rian Pressman wrote. “Its business stability has weakened as market perceptions of its creditworthiness have declined.”

Shares of First Republic slumped by as much as 26% Wednesday, with other regional banks also lower in another volatile day of trading. First Republic pared the drop to 7.1% as of 10:16 a.m. in New York.

A spokesperson for First Republic Bank declined to comment.

S&P expects the lender to ramp up wholesale funding in the aftermath of collapses at Silvergate Capital Corp., SVB Financial Group’s Silicon Valley Bank and Signature Bank. The move stands to hit both interest margin and profitability, the analysts wrote.

“First Republic’s total profitability is more weighted toward net interest income than most regional bank peers since its fee income (mostly fees related to wealth management) is less than 20% of total profit,” they wrote.

In the wake of the collapse of SVB, US regulators put together an emergency package of support for financial institutions, designed to prevent any further failures.

First Republic Bank and five other US lenders were placed on review for downgrade by Moody’s Investors Service earlier in the week.

–With assistance from Bre Bradham and Nina Trentmann.

(Updates to add context from the report throughout and adds market moves in fourth paragraph.)