First Republic Under Pressure, GDP Growth Slower Than Expected

What's happened recently?

The banking sector experienced a sizable aftershock this week as First Republic released its first quarter earnings showing continued deposit outflows during the period. The end result is still yet to be determined, but we understand that these events can cause feelings of uncertainty and create questions around future implications.

As such, we are available to help guide you through your specific needs if you would like to discuss any relationship or exposure to First Republic Bank.  

Here are a few things standing out in the news:

• First Republic’s continued challenges
• Q1 US GDP report
• The Fed’s next move

Why is this important?

Ongoing issues with First Republic and uncertain action by the Fed continues to fuel volatility across markets.  

• On Monday, First Republic reported a $100 billion deposit outflow during the first quarter (Q1) of 2023. The bank is currently exploring a number of strategic options, but the situation remains challenged. 
• Yesterday, the Bureau of Economic Analysis released its Q1 2023 GDP Report. Data over the last two months suggested U.S. economic growth to be above 2.0%, but the actual figure was a more disappointing 1.1%. Very strong consumer spending drove the increase, offsetting a decline in inventories and private investment. The early forecast for Q2 is positive economic growth.
• We expect the Fed to increase the Fed Funds Rate next week by 25 basis points. The question now is where does the Fed go from here? Our expectation is the Fed to slow their rate hikes and likely pause. This is in contrast to the market that expects rate cuts later in 2023 to combat a future recession. 

What's our take?

It’s important to look beyond headlines to better understand the state of regional banks. The chart below depicts how the regional bank index, First Republic and PacWest Bancorp (another regional bank) have performed since March 1, 2023.

• While First Republic’s share price is down ~73% in the last week (as of this morning), it’s useful to think in terms of share price vs. % 's to see how much of the erosion already occurred in the wake of SVB’s collapse. 
• Despite the continued uncertainty amongst the regional banks, index volatility has remained somewhat muted since the collapse of SVB.

There is still fragility in the financial system and credit conditions remain tight, which demands keeping an eye on short-term market risks. To mitigate risks from uncertainties in the markets, we believe in having responsible cash management, evaluating your goals, and ensuring that you have properly diversified and tailored investments. 

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