Source: Barron's
Author: Andrew Barry
J.P. Morgan Chase got a very clean bank and did it in the cleanest way.
$JPMorgan (JPM.US)$Will take over$First Republic Bank (FRC.US)$All of the deposits, and after the bank was shut down by the US Federal Deposit Insurance Corporation (FDIC), it took over most of the San Francisco-based bank's assets.
The acquisition marks the end of the latest round of turmoil in the banking industry after Silicon Valley Bank (Silicon Valley Bank) and other banks went bankrupt in March. J.P. Morgan CEO Jamie Dimon (Jamie Dimon) said that the banking system is stable, and most banks do not have the risk exposure of uninsured deposits like First Republic Bank.
“This part of the crisis is over,” Dimon said. “Now let's take a deep breath.”
The acquisition of First Republic Bank was a good deal
US President Joe Biden (Joe Biden) said that the actions of US regulators “will ensure the safety and health of the banking system,” and he also talked about how the US authorities took over Bank First Republic and reached an agreement with J.P. Morgan to sell most of its business to the latter.
“Let me be very clear: all savers are protected. Shareholders will bear the loss of their investments. “The point is, taxpayers aren't the ones in the middle of a trap,” Biden said.
The Federal Deposit Insurance Corporation said in a statement on Monday that 84 of First Republic Bank's offices will be taken over by J.P. Morgan. J.P. Morgan said it did not take on First Republic Bank's corporate debt or preferred shares. The deal is expected to increase J.P. Morgan's earnings and generate more than $500 million in net revenue each year.
“We think this is a very positive deal for J.P. Morgan and should help drive higher long-term returns for its shareholders,” analysts at Royal Bank of Canada Capital Markets (RBC Capital Markets), headed by Gerard Cassidy (Gerard Cassidy), wrote in a report.
The US Federal Deposit Insurance Corporation said that J.P. Morgan will “buy most of First Republic Bank's assets.” As of April 13, First Republic Bank had total assets of approximately $221.1 billion and deposits of approximately $103.9 billion. The Federal Deposit Insurance Corporation and J.P. Morgan will share losses on single-family, residential, and commercial loans.
“It is expected that the loss share deal will keep assets in the private sector, thereby maximizing asset recovery,” the US Federal Deposit Insurance Company said. “It is expected that this deal will also minimize interference to loan customers.”
According to the US Federal Deposit Insurance Corporation, the cost of deposit insurance funds is about 13 billion US dollars.
According to reports, Citizens Financial Group (CFG) shares fell 5.4% and PNC Financial (PNC) fell 5.5% after rivals participating in the bid for Bank First Republic were rejected.
“Our government invited us and other banks to act, and we did it,” Dimon said in a statement. “Our financial strength, capabilities, and business model have enabled us to develop a form of bidding to minimise the cost of deposit insurance funds.”
Investors have lost confidence in First Republic Bank because the bank reported a loss of $72 billion in first-quarter deposits last week, causing investors to worry that the bank is no longer viable.
Prior to this incident, Bank of America stocks had been turbulent for a period of time in March, which led to the collapse of Silicon Valley Bank and Signature Bank. First Republic was bailed out when J.P. Morgan and several other larger banks proposed injecting $30 billion in deposits into First Republic Bank.
Other regional banks declined slightly on Monday. PacWest Bancorp (PACW) fell 6.8%, Western Alliance (WAL) fell 0.7%, and KeyCorp (KEY) fell 2.7%.
Capital Alpha Partners said that regulators and lawmakers in Washington may find the acquisition irritating because it has made J.P. Morgan Chase bigger.
“Since the 2008 financial crisis, regulators have been trying to stop big banks from becoming more dominant,” Capital Alpha's Ian Katz (Ian Katz) wrote in a briefing. “The fact that America needs one of the biggest banks to bail out one big bank has stifled many hopes and plans.”
Jamie Dimon is a good buyer
There's a reason Jamie Dimon is America's top banker.
The long-time CEO of J.P. Morgan took decisive action and planned a deal that now appears to be a very successful one during the bid to buy First Republic Bank. The shareholders of his bank should benefit from it.
This is a response from the stock market: J.P. Morgan's stock price rose 2.14% to $141.2 on Monday afternoon, while the stock prices of its rivals Bank of America (BAC), Morgan Stanley (MS), and Goldman Sachs Group (GS) all fell.
Simply put, J.P. Morgan obtained approximately $186 billion in assets, undertook $168 billion in liabilities, received $18 billion in net worth, and paid $10.6 billion to the Federal Deposit Insurance Corporation. It looks like the deal will generate nearly $8 billion in revenue, although the bank initially acknowledged only $2.6 billion and will absorb $2 billion in restructuring costs in 2023 and 2024.
Furthermore, the price of most of the assets purchased by J.P. Morgan Chase (loans of about $173 billion) was only 87% of face value. It paid $150 billion for the loan, which is $23 billion less than the book value. Most of these loans are high-end single-family home mortgages issued to major customers, and the US Federal Deposit Insurance Company is providing the bank with extensive insurance to protect it from losses. The main reason why mortgages are discounted is that their average interest rate is around 3%, which is half the cost of a mortgage today.
J.P. Morgan will also absorb an attractive wealth management network. The network has been losing financial advisors due to First Republic Bank's woes. Expanding wealth management has long been one of the bank's goals. First Republic Group has approximately $300 billion in wealth management assets, and the division's annual revenue exceeds $800 million.
Wells Fargo (Wells Fargo) analyst Mike Mayo (Mike Mayo) wrote in a client report earlier Monday: “First Republic's acquisition agreement appears to be strategically consistent (which accelerates wealth expansion), financial appeal (assuming it may be conservative), and system friendliness,” pointing out the benefits of the acquisition agreement to the entire financial system.
He raised J.P. Morgan's 2023 earnings forecast by 15 cents to $14.50 per share, and raised the 2024 US stock earnings forecast by 10 cents to $13.80. He rated JPMorgan Chase (JPMorgan) as “increase in holdings”, with a target price of $174, and believes that this target price is relatively conservative. The stock's current trading price is 10 times the expected earnings per share this year, with a yield close to 3%.
One of the challenges J.P. Morgan faces is retaining First Republic Bank's high-end customer base. Mayo wrote, “This is a question to be determined (what remains to be determined is how J.P. Morgan serves wealthy customers, even though it knows how to do it, but it doesn't have attractively priced loans).” First Republic Bank is famous for providing huge mortgages at extremely low interest rates in places such as East Hampton, New York, Connecticut, and Manhattan.
Mayo pointed out that the government's performance was also better than many people expected. The Federal Deposit Insurance Corporation expects First Republic to lose $13 billion, while some people have previously estimated this figure to be as high as $20 billion.
J.P. Morgan said the deal will increase its annual revenue by 500 million US dollars, and the total revenue is expected to reach 40 billion US dollars this year. This figure may prove conservative, as First Republic makes around $1 billion a year as an independent company.
“Basically, you get a very clean bank, and in the cleanest way you can find,” J.P. Morgan Chief Financial Officer Jeremy Barnum (Jeremy Barnum) said in a conference call earlier Monday. “But that doesn't mean there are no risks; it just means you have a very clean bank, and it's the cleanest way you can get.”
Dimon is 67 years old this year, and he is expected to be CEO for another three years. Shareholders have reason to be happy that he can stay, because without him, J.P. Morgan might not be as actively seeking a deal as it did when it bought First Republic Bank.
Editor/Somer