First Republic Bank Cut to Junk by S&P on Deposit Outflow Risk

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(Bloomberg) — First Republic Bank was cut to junk by S&P Global Ratings amid concerns that customers pull holdings from the lender, a move that comes after regulators stepped up support for the banking sector.

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The California-based bank’s credit rating was downgraded from A- to BB+ on Wednesday and remains on credit watch negative, according to a statement from S&P. Despite recent steps by the bank to boost its borrowing capacity, further downgrades are possible, with credit appraisers citing risks of additional deposit outflows.

“The bank’s business condition will be impacted following increased media attention around share price volatility and deposit volatility,” wrote S&P analysts Nicolas Wetzel and Ryan Pressman. “Its business stability has weakened as market credit perception has deteriorated.”

Shares of First Republic plunged 26% on Wednesday, along with other regional banks in another volatile day of trading. First Republic was down 7.1% in New York as of 10:16 a.m. ET.

A spokeswoman for First Republic Bank declined to comment.

S&P expects the lender to ramp up wholesale funding after declines at Silvergate Capital Corp., SVB Financial Group’s and Signature Bank. The move affects both interest margin and profitability, the analysts wrote.

“First Republic’s overall profitability is more heavily weighted toward net interest income than most regional bank peers because its fee income (mostly money management-related fees) makes up less than 20% of total profit,” they wrote.

In the wake of SVB’s collapse, regulators prepared an emergency package of assistance for financial institutions, designed to prevent any further failures.

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First Republic Bank and five other lenders were placed on review for downgrade by Moody’s Investors Service earlier this week.

-With assistance from Bre Bradham and Nina Trentman.

(Updates to add context to report and adds market moves in fourth paragraph.)

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