FRC - First Republic credit rating cut again at Fitch may be cut further

2023-03-23 07:20:30 ET

Fitch Ratings downgraded First Republic's ( NYSE: FRC ) long-term issuer default rating to B from BB late Wednesday, bringing it deeper into junk territory. The ratings company kept it on Rating Watch Negative, meaning that Fitch may cut the credit rating further.

The action reflects First Republic's ( FRC ) financial profile and the challenges it faces from both a funding and earnings perspective, Fitch said. "The bank's funding mix has materially altered over the last two weeks as withdrawn deposits have been replaced with costly wholesale borrowing, primarily from the Fed discount window," it said.

Fitch estimated that due to the higher cost of funds, FRC is currently operating at a net loss that isn't sustainable over the longer term unless it restructures its balance sheet.

It's the second time that Fitch has downgraded the credit rating in a month. On March 14, First Republic ( FRC )  was downgraded to BB and its ratings were placed on Watch Negative.

Fitch believes that FRC's liquidity position has improved since the last downgrade, as a group of 11 large banks have deposited $30B in the bank for at least 120 days. "Deposit flows have shown improvement for FRC in recent days and following receipt of the deposit package, the bank currently has adequate liquidity to provide coverage of remaining uninsured deposits (not counting the recent $30B package)," Fitch said.

The credit rating firm called FRC's asset quality "pristine," as the majority of FRC's loans are super-prime residential mortgages that have benefitted from the bank's conservative underwriting standards.

In Thursday premarket trading, FRC stock bounced up after dropping 16% on Wednesday following Treasury Secretary Janet Yellen's comments that regulators are not considering a blanket deposit insurance to stabilize the U.S. banking system.

On Wednesday, Citibank withdrew its Neutral rating on the stock and is keeping it "Under Review" due to its recent swing in its shares.

Earlier this week, Reuters reported that First Republic ( FRC ) was exploring options for selling parts of its business to raise cash and cut costs.

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