JPMorgan Chase's emergency deal to buy the failed First Republic Bank is far from a game-changer for the country's largest bank, analysts say.
But it does further cement the megabank's unique ability to help regulators get the U.S. banking system out of a bind. And it gives the New York megabank access to First Republic's mostly wealthy clients, boosting its efforts to expand in the highly competitive wealth management sector.
"It's an affluent client base, and every bank wants to grow wealth management," said Michael Driscoll, managing director at the ratings firm DBRS Morningstar.
The influx of wealthy clients — to a bank with no shortage of them — is one reason why JPMorgan's shares were up more than 2% on Monday after the acquisition was announced overnight.
The deal should add some $500 million in earnings every year, JPMorgan said. The bank will report a one-time gain of $2.6 billion, though the impact will be blunted by $2 billion in restructuring costs that JPMorgan expects to absorb by the end of 2024.
"We did not seek out this deal, but it does have financial benefits," Chief Financial Officer Jeremy Barnum said Monday on a call with analysts.
The benefits may end up being somewhat bigger over time, since JPMorgan took a cautious approach in modeling the deal's financial impact, acknowledging that there are questions about how many of First Republic's deposit customers it will be able to retain. One analyst pointed out that First Republic's annualized earnings are substantially above the $500 million JPMorgan Chase is counting.
"We are very eager. We're gonna fight hard to keep all the clients," Barnum said. "We welcome any clients who left to come back. But you know, this is an uncertain situation."
The deal was the least costly alternative for the Federal Deposit Insurance Corp. fund that covers depositors' money in bank failures, the agency said. It came after a frantic weekend of discussions between the FDIC and several big banks that expressed interest in bidding on First Republic.
The FDIC estimates that its deposit insurance fund will still take a $13 billion hit, but the amount would have been far bigger if no deal had been reached, analysts said.
Critically, the acquisition averted the need for the FDIC to use a
As part of the deal, JPMorgan is acquiring First Republic's 84 branches, $173 billion in loans, $30 billion in securities and $92 billion in deposits. The latter figure includes $30 billion that JPMorgan and 10 other big banks placed at First Republic last month when the San Francisco bank showed signs of stress.
For JPMorgan, even though the financial impact appears to be modest, the deal is attractive because of the high-net-worth client base that it is receiving.
"It doesn't move the needle much. But it aligns well with the type of customer that JPMorgan likes to have," said Cheryl Pate, senior portfolio manager at Angel Oak Capital Advisors.
JPMorgan CEO Jamie Dimon said that hundreds of bank staffers worked on the deal throughout the weekend, culminating in an announcement at around 3:30 a.m. Eastern time on Monday. Now the longer-term work begins: convincing First Republic's clients and staffers to stay.
Two of Dimon's top lieutenants, Marianne Lake and Jennifer Piepszak, will oversee the businesses JPMorgan acquired. They are co-CEOs of JPMorgan's consumer and community banking division, and each of them is seen as a top candidate to succeed Dimon.
Some wealth advisors have
"We think JPMorgan is a great place for advisors to grow their practice and stay for the rest of their careers," Barnum said. "We do understand that these are really good teams of high-quality advisors who have choices."
JPMorgan has an existing focus on growth in the wealth management sector, noted Scott Siefers, a Piper Sandler analyst. The First Republic deal should bring "modest financial benefits," but the biggest impact is that it further solidifies the megabank's status as the industry's "strongest player," he wrote in a note to clients.
"It had already been the go-to deposit destination for nervous customers, and now it is officially taking a problem institution out of the game and easing concerns again," Siefers wrote, noting that the bank has now "positioned itself as an industry champion through two crises."
JPMorgan absorbed the mortgage lender Washington Mutual, as well as the investment bank Bear Stearns, during the 2008 financial crisis.
The latter acquisition ended up being particularly painful to JPMorgan, saddling the bank with massive legal costs. "No, we would not do something like Bear Stearns again," Dimon wrote in his 2015
The First Republic deal is a "very, very different situation," since buying an institution out of receivership leads to far fewer complications, Barnum told reporters. Despite First Republic's challenges, the bank is a "fairly simple institution," he added.
JPMorgan is "getting a very clean bank in the most clean way you can get it," Dimon told analysts.
The bank is paying $10.6 billion to the FDIC and is taking out a $50 billion five-year fixed-rate loan from the agency to fund the deal. Both parties have agreed that the FDIC will share in potential losses on mortgages and commercial loans that JPMorgan Chase bought.
Many of First Republic's loans were mortgages to wealthy clients, making the risk that borrowers will fail to repay far smaller than at other banks with less affluent borrowers.
But the loss-sharing agreement with the FDIC has another benefit. It reduces the risk weighting on the loans for capital measurements, which Barnum said "contributes to the capital efficiency of the deal."
