Any rescue plan of First Republic Bank that includes sales of its government backed residential mortgage bonds would likely result in “contained damage,” according to Goldman Sachs.
First Republic
FRC
has returned to the spotlight in recent days as reports of a potential rescue effort of the bank emerged, including a Bloomberg report of a potential sale of $50 billion to $100 billion of its assets from its balance sheet.
Shares of First Republic tumbled about 40% on Friday, with shares dipping below $4, according to FactSet. The bank declined to comment on any asset sales, but said it was “engaged in discussions with multiple parties about our strategic options while continuing to serve our clients.”
See: Analyst sees market betting on First Republic bailout as early as Friday
Regional banks have been reeling from their exposure to older, low-coupon bonds after the Federal Reserve’s rapid pace of interest rate hikes left many exposed to debt valuation risks, sparking stress in the U.S. banking system.
“At first glance, this would appear to be an unfriendly development” for the roughly $8.8 trillion agency residential mortgage-bond market, given recent sales of assets seized by the Federal Deposit Insurance Corp. from Silicon Valley Bank and Signature Bank, wrote Goldman team of analysts led by Lotfi Karoui, in a weekly client note.
However, given First Republic’s exposure to the residential mortgage-bond market is the lowest of the largest regional banks (see chart), and that around 78% of its assets in the sector are in loan form, “the impact would likely be minor,” the team argued.
First Republic has lowest RMBS exposure of 10 largest regional banks
SNL, Goldman Sachs Global Investment Research
The chart shows First Republic ended 2022 with only about a 13% exposure to the residential mortgage-bond sector within its securities book, whereas several other large regional banks had exposures of 80% and higher.
Government backed residential mortgage bonds have long been a main artery of financing the U.S. housing market, especially in the past decade of ultralow interest rates. That’s been great for homeowners able to lock in 30-year fixed mortgage rates of about 3%, but a shock recently for investors in the bonds.
Silicon Valley Bank collapsed in March after a sudden a sale of its assets resulted in a sharp loss, hastening a run on its deposits. The FDIC began selling seized assets from SVB and Signature Bank in mid-April, with the first parcel fetching 85 to 90 cents on the dollar.
Related: Fed in part blames Trump-era bank deregulation for Silicon Valley Bank failure
“Similar to our view on the ongoing FDIC sales, we think the depth and liquidity” of the sector will allow any potential sales to be absorbed “with little pressure,” the Goldman team said.
Stocks closed higher Friday, booking weekly and monthly gains, with the Dow Jones Industrial Average
DJIA,
+0.14%
up 2.5% in April, the S&P 500 index
SPX,
+0.30%
advancing 1.5% for the same stretch and the Nasdaq Composite Index
COMP,
+0.66%
ending the month flat.
