The crisis of confidence experienced by the U.S. banking sector in March spilled over into April, with regulators seizing First Republic Bank and selling its assets at auction just days later.

JPMorgan Chase & Co landed the winning bid, agreeing to assume all of First Republic’s deposits while also repaying $25 billion of the $30 billion deposited by major banks in March to support First Republic. In addition, JPMorgan will pay the U.S. Federal Deposit Insurance Corp (FDIC) $10.6 billion for ownership of First Republic’s assets and wealthy clientele. First Republic’s 84 branches across eight states reopened as JPMorgan Chase Bank branches at the start of May.

First Republic was amongst the regional lenders hardest hit after March’s troubles saw depositors flee to the safety of big banks. Its collapse represents the largest U.S. bank failure since the 2008 financial crisis.¹

Ironically, the banking sector’s recent turmoil, which saw the collapse of Silicon Valley Bank, Signature Bank, and now First Republic, could be contributing to a surge in initial public offerings (IPOs).

Research firm Renaissance Capital reports that there have been 39 IPOs in the U.S. this year, up 77% from the previous year. This follows the low of 149 IPOs in 2022, down from 908 in 2021. Some analysts suggest that the tighter credit conditions resulting from the regional banking turmoil have forced companies needing cash to sell shares instead of seeking loans, as they might have done during more stable times.

As many as 1,000 companies worth over $1 billion are reportedly ready to go public but are waiting for more favourable economic conditions. With peak inflation potentially behind us, energy prices coming down, and mainland China’s economy recovering, we could see a flood of new IPOs as early as Q4 of 2023. The financial sector could potentially reap significant fees from facilitating these IPOs, suggesting the possibility of good times ahead for the industry.²

Updates on Specific Bank Stocks

Wells Fargo & Company

Wells Fargo benefited from higher interest rates in Q1, as its net interest income surged to $13.34 billion for the quarter, up 45% from the same time a year ago, beating analyst expectations.³

Also in April, Wells Fargo announced a ten-year strategic partnership with the T.D. Jakes Group that aims at “revitalizing neighbourhoods, fostering economic opportunity and creating long-term change in communities most in need.” In the coming decade, the venture could see as much as $1 billion in capital and financing from Wells Fargo for transforming communities around the United States.

The first project Wells Fargo will likely support is the revitalization of 100 acres of the historic former army base Fort McPherson, near downtown Atlanta. Plans include commercial and mixed-income residential space, green spaces, bike paths, recreation, and amenities.⁴

First Citizens Bank

The purchase and assumption of all deposits and loans from failed rival Silicon Valley Bank (SVB) are already yielding positive results for First Citizens Bank. In April, Flux Power Holdings, a developer of lithium-ion energy storage solutions for commercial and industrial equipment, renewed its $14.0 million revolving line of credit previously held under SVB with First Citizens Bank. Flux Power Holdings said credit availability was vital for meeting the working capital requirements spurred by growing customer demand.⁵

 

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Portfolio Strategy and Activity

For the month, JPMorgan Chase & Co made the largest contribution to the Fund, followed by Wells Fargo Co and First Citizens BancShares Inc. The largest detractors to performance for the month were KeyCorp, followed by East West Bancorp Inc and U.S. Bancorp.

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Sources:

1. Murdoch, S., Nishant, N., & Prentice, C., “Regulators seize First Republic Bank, sell assets to JPMorgan,” Reuters, May 1, 2023; https://www.reuters.com/business/finance/california-financial-regulator-takes-possession-first-republic-bank-2023-05-01/
2. Goodkind, N., “The banking crisis may have set the stage for an IPO comeback,” CNN Business, April 25, 2023; https://www.cnn.com/2023/04/25/investing/premarket-stocks-trading/index.html
3. Zainab Hussain, N., Saini, M. & Azhar, S., “Wells Fargo profit exceeds estimates as rising rates bolster income,” Reuters, April 14, 2023; https://www.reuters.com/business/finance/wells-fargo-profit-rises-higher-rates-bolster-interest-income-2023-04-14/
4. “Wells Fargo and T.D. Jakes Group Announce Ten-Year Strategic Partnership to Build Inclusive Communities,” Yahoo Finance, April 27, 2023; https://finance.yahoo.com/news/wells-fargo-t-d-jakes-130000086.html
5. “Flux Power Renews $14 Million Credit Facility with First Citizens Bank,” BusinessWire, April 27, 2023; https://www.businesswire.com/news/home/20230427005893/en/Flux-Power-Renews-14-Million-Credit-Facility-with-First-Citizens-Bank

 

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