First Republic surges after Janet Yellen pledges US banks support

Shares of First Republic Bank surged more than 50% on Tuesday — latching onto a major rebound of regional bank stocks — after Treasury Secretary Janet Yellen pledged support to US banks in a bid to tamp down fears of financial contagion.

Yellen told members of the American Bankers Association that the federal government is ready to step in to help other troubled lenders after the collapse of Silicon Valley Bank and Signature Bank.

“The steps we took were not focused on aiding specific banks or classes of banks. Our intervention was necessary to protect the broader US banking system,” Yellen said. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”

Yellen’s vow helped shares of regional banks like Pacwest soar 20%. New York Community, which agreed to buy up a huge chunk of Signature, rose more than 7%.

San Francisco-based First Republic was up 51%, bouncing back after suffering a 90% drop this month — including nearly a 50% plunge on Monday.

First Republic’s rebound also followed news late Monday that JPMorgan Chase CEO Jamie Dimon is spearheading discussions to raise new capital for the bank or a consortium takeover if another sale does not happen in the near term.

JPMorgan Chase led a group of 11 banks last week to deposit a combined $30 billion into First Republic.

The bank’s credit rating dropped from BB+ to B+ on Sunday, indicating that the financial institution is particularly vulnerable to economic headwinds, raising default rates. 

Fears of contagion in the regional banking sector triggered a market rout last week that has not been seen since Russia invaded Ukraine, a Bank of America’s Global Fund Manager Survey showed.

“The stocks are more inexpensive today than they were during the pandemic, and if you don’t buy banks here, we aren’t sure when you do,” Baird analysts said, adding that the market is currently pricing in 40-50% permanent reduction in return on assets, which are “beyond silly.”

Treasury Department officials are looking into whether federal regulators have enough emergency authority to insure deposits above the current $250,000 cap on accounts without the consent of Congress, according to the report by Bloomberg News.

For now, the US government will step in and protect depositors, 50 Park Investments CEO Adam Sarhan said.

“If that happens, these stocks will not go to zero … (which) means they are very cheap right now so value investors are attracted and buying at these low levels,” Sarhan added.

Despite Tuesday’s recovery, some investors were skeptical of First Republic’s stability.

“We believe First Republic remains in crisis,” said Jason Benowitz, senior portfolio manager at CI Roosevelt.

The volatility in its shares reflects shifting probabilities, including a bank failure that might leave the stock worthless, a recapitalization that would likely be highly dilutive relative to book value, or a sale that might be also highly dilutive, Benowitz said.

With Post wires