JPMorgan lands as winner in U.S. regulator auction of First Republic

By Scott Murdoch and Niket Nishant

(Reuters) -Jamie Dimon’s JPMorgan Chase & Co (NYSE:) emerged as the winner of a weekend auction of First Republic Bank (NYSE:), in a deal that is meant to draw a line under a recent banking crisis but comes at the cost of making the largest U.S. bank even bigger. 

JPMorgan will make a payment of $10.6 billion to the U.S. Federal Deposit Insurance Corp (FDIC) as part of a deal that will see it take control of most of the assets of the San Francisco-based bank. The bank will get access to First Republic’s coveted client base made up of the wealthy.

It will cost FDIC’s Deposit Insurance Fund (DIF) about $13 billion, according to the regulator’s initial estimate.

California regulators also seized First Republic and put it into FDIC receivership alongside the sale of its assets, marking the third failure of a major U.S. bank in two months and the largest since the Washington Mutual in the 2008 financial crisis.

First Republic was one of the major casualties of the banking crisis triggered in March, when depositors fled en masse from some U.S. lenders to institutions such as JPMorgan that they thought were safer.

Analysts and industry executives said the deal — struck over the weekend after the FDIC ran an auction process that saw several other banks bid — should calm markets. But they added that it came at a cost: the biggest banks were getting stronger while it was getting harder for smaller banks to do business.

Dennis Kelleher, president and CEO of Wall Street reform group Better Markets, said the auction’s outcome showed “unhealthy consolidation, unfair competition, a dangerous increase in too-big-to-fail banks — all while harming community banks, small business lending, and economic growth.”

“Regulators need a much better game plan for resolving those dangerous banks when they get into trouble,” Kelleher said.

Shares of JPMorgan and some of the other the largest U.S. banks rose on Monday, while several of those from the next tier fell. First Republic shareholders will be wiped out in the transaction, Wedbush analysts said. The bank’s shares tumbled 43.3% in premarket trading on Monday before they were halted.

JPMorgan already holds more than 10% of the nation’s total bank deposits. Wells Fargo (NYSE:) analyst Mike Mayo wrote in a research note that JPM’s net deposits would increase by 3% as a result of the deal. 

JPMorgan also entered into a loss-share agreement with the FDIC on single family, residential and commercial loans it bought, but will not take First Republic Bank’s corporate debt or preferred stock.

“Our government invited us and others to step up, and we did,” said Jamie Dimon, JPMorgan Chairman and CEO, who had been a key player in the 2008 financial crisis, buying Bear Stearns in a weekend rescue.

RISING RATES

Global banking has been rocked by the closure of Silicon Valley Bank and Signature Bank (OTC:) in March, as deposit flight from U.S. lenders forced the Fed to step in with emergency measures to stabilize markets while Switzerland’s Credit Suisse had to be rescued by rival UBS. Those failures came after crypto-focused Silvergate voluntarily liquidated.

First Republic disclosed last week that it had suffered more than $100 billion in outflows in the first quarter and was exploring options, increasing stress in the banking sector.

Some blamed the root cause of the crisis in the banking sector on monetary policy, which was ultra loose for many years but was abruptly reversed by the U.S. Federal Reserve over the past year.

Investors have priced in a 90% chance of another 25 basis point rate hike after the central bank’s two-day policy meeting on Wednesday, according to CME Group’s (NASDAQ:) FedWatch tool.

“When it was just SVB, it was easy to blame management. However, now that we see the pattern, it is evident that the Fed has moved too far, too fast and is breaking things,” said Thomas J. Hayes, Chairman and Managing Member, Great Hill Capital.

HOT COMPETITION

JPMorgan was one of several interested buyers including PNC Financial Services Group (NYSE:), and Citizens Financial (NYSE:) Group Inc, which submitted final bids on Sunday in an auction by U.S. regulators, sources familiar with the matter said.

Jefferies analysts said JPMorgan’s size may have played to its advantage, as it could make the math for the deal work better than the other bidders could.

JPMorgan has assumed all of the bank’s deposits, it said, and will repay $25 billion of the $30 billion big banks deposited with First Republic in March.

JPMorgan said it expected to achieve a one-time, post-tax gain of about $2.6 billion after the deal. It also estimated $2 billion dollars of post-tax restructuring costs likely over the next 18 months.

The failed bank’s 84 offices in eight states will reopen as branches of JPMorgan Chase Bank from Monday, it added.