First Republic’s strategic options “very challenging” – Fitch

First Republic Bank branch in Midtown Manhattan in New York CityA First Republic Bank branch is pictured in Midtown Manhattan in New York City, New York, U.S., March 13, 2023. REUTERS/Mike Segar/File Photo

NEW YORK, April 25 (Reuters) – First Republic Bank's (FRC.N) strategic options are "very challenging" because any potential sale is unlikely without the lender taking big writedowns on its mortgage loan book and securities portfolio, analysts at Fitch Ratings said on Tuesday.

"If someone were to acquire them … there's going to be some big writedowns that would have to be taken against some of the assets," Christopher Wolfe, head of North American banks at Fitch Ratings, told Reuters in an interview.

"The options are very challenging and probably very costly, especially for shareholders. Who's going to bear the cost?" Wolfe said.

First Republic on Monday reported a plunge of more than $100 billion in deposits in the first quarter after U.S. banks were roiled by the biggest crisis since 2008.

The bank said it was "pursuing strategic options" to strengthen the bank, without providing details.

First Republic declined to comment.

Fitch rates First Republic as 'B' on its credit scale, deeming its bonds as highly speculative, with a material default risk and limited margin of safety. Fitch has a "negative watch" on the bank.

"There are still more downside risks until some clarity emerges on what their strategic options can be," Wolfe said.

The quality of the bank's loan portfolio is very strong, but the mortgages it has underwritten — which typically have terms spanning decades — would likely mean that the bank would have to book losses if it sold them, said Johann Moller, a director at Fitch's U.S. financial institutions group.

First Republic also holds a large amount of long-term municipal bonds, which would probably require a writedown if they were sold.

"It's all driven by interest rate risk," Moller said.

First Republic's total investment securities stood at $34.8 billion at the end of March, rising 9.8% from the fourth quarter, it said on Monday.

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