The sale, which includes long-term mortgages and securities, aims to reduce the mismatch between the bank’s assets and liabilities.
Potential buyers, including major US banks, could receive guarantees or preferred shares as an incentive to buy assets above market value, one source said.
The day after First Republic reported earnings well below analysts’ estimates, investors are fully aware of the challenges facing the bank.
The lender is trying to bolster its balance sheet to avoid a FDC arrest and clear the way for a possible capital increase, the source said. The source added that the US government may need to assist in negotiations with some of the largest banks in the country to stabilize the lender while it is bailing out. This would be a much cheaper alternative than bankrupting the company.
First Republic shares tumbled 23% in early New York trading on Wednesday, after falling on Tuesday halved its market value to $1.5 billion. In early March, the bank’s value exceeded $22 billion.
In addition to selling assets, the bank also plans to focus on loans that can be sold on the secondary market, the bank said Monday.
The business is now under pressure after dozens of consultants have moved on to top competitors including Morgan Stanley, UBS Group AG and Royal Bank of Canada. It also got analysts thinking about the future of a once-valuable business that drew clients from wealthy US enclaves.
According to its first quarter earnings report, First Republic’s total assets as of March 31 were $233 billion, including $173 billion in loans and $35 billion in investment securities.
An asset-liability mismatch can occur when interest rates rise, forcing banks to pay savers a higher interest rate than they charge borrowers. In First Republic, this problem is especially serious because most of its assets are single-family mortgages issued when interest rates were at historic lows. Unloading them will help eliminate the discrepancy.
Adding to the pressure is First Republic’s willingness over the years to seduce wealthy homebuyers and real estate investors with floor rates for several years. Some mortgages even allowed borrowers to default on principal for ten years.
Chief Financial Officer Neil Holland said that the bank’s management is now working on restructuring the business.