Analysis: Asset concerns weigh on US regional banking talks

NEW YORK, March 19 (Reuters) – Efforts by some regional U.S. banks to raise capital and ease fears about their health are facing concerns from potential buyers and investors about looming losses on their assets, five sources familiar with the discussions said.

First Republic Bank ( FRC.N ) and PacWest Bancorp ( PACW.O ) are among the banks that have spoken to peers and investment firms about possible deals after U.S. regulators take over Silicon Valley Bank ( SIVB.O ) and Signature. The bank ( SBNY.O ) this month amid a flight of depositors, sources have 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.

Five sources who work at major banks and private equity firms and study such deals told Reuters they have decided not to participate for now because they fear they will have to go into investment portfolios and loan portfolios.

They requested anonymity because they were not authorized to discuss confidential conversations publicly.

The investment portfolios in which regional banks have invested their customers’ deposits mainly consist of Treasuries and other securities such as mortgage loans.

Their value is less than what the banks value in their books due to the sharp rise in interest rates. Some of these banks’ loan portfolios are also underwater, due to high interest rates and concerns about a slowing economy.

The sources said they were reluctant to participate in these deals without government guarantee protection against losses or a more favorable interest rate outlook.

Reuters was unable to determine whether the suitors had asked banking regulators to block portfolio losses and whether they would do so.

The Federal Deposit Insurance Corporation (FDIC), which insures deposits and handles settlement procedures, told banks considering bids in auctions for Silicon Valley Bank and Signature Bank on Friday that it is considering holding some of the underwater assets with failed lenders. However, such a remedy is generally reserved for banks that have been taken over by the FDIC.

An FDIC spokesman did not respond to a request for comment.

HUGE losses

Credit rating agency Moody’s Investors Service Inc estimated on Friday that unrealized losses on First Republic’s investment portfolio represented 37.7% of the cash and stocks it has set aside to cover losses, and warned that some of its mortgages would also be difficult to sell without a loss. .

“Such a consolidation of losses, if it were to occur, would weigh very materially on the bank’s profitability and capital,” Moody’s said.

One bank executive who studied the deal with First Republic estimated that the valuation of the Californian bank’s mortgage book in the market acquisition would be a big hit for the buyer.

The government should facilitate such an agreement, the leader said. It could do so by providing leeway for the buyer’s debt ratios, which determine the bank’s debt level, or prevent it in other ways, the executive added. The manager was not aware of such discussions.

Another difficulty in cutting an agreement with regional banks is the uncertainty about the interest rate outlook, said a lawyer who works with bank transactions.

The Federal Reserve will decide on Wednesday whether to raise interest rates further in its fight against inflation. Those studying the deals and trying to assess the future value of regional banks are hoping for clarity on how aggressively the central bank plans to continue raising interest rates, the lawyer said.

BY

It’s unclear how long some regional banks can get involved without an agreement.

Although new liquidity safeguards created by the US Treasury and regulators last Sunday are keeping regional banks afloat, the crisis has weakened their profitability and made it difficult to continue operations as before, banking analysts say.

Bank of America analysts wrote in a research note on Friday that the $30 billion in deposits that First Republic’s major partners moved in solidarity with the troubled bank helped stabilize its funding base but did little to help its earnings, given the flight of some of its customers.

“In addition to the markup, the final value a potential buyer is willing to pay will also be influenced by his assessment of potential impairment to the First Republic customer franchise,” 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

Our standard: Thomson Reuters Trust Principles.