Something may happen soon—probably outside trading hours—that could be a defining moment for First Republic and the financial system.
First Republic had appeared to have overcome the turmoil in March after JPMorgan and other large lenders stepped in with $30 billion in deposits. The calm lasted until the bank reported just how extensive the flight by depositors was.
Shares have dropped almost 60% this week. One thing seems clear—time is running out for First Republic to save itself. So far promises to cut jobs, shrink its balance sheet, and shore up deposits haven’t done the trick. Limping on may be possible, but it doesn’t look like a viable choice.
So what are the other options ahead? The Federal Reserve, Federal Deposit Insurance Corporation, and Treasury Department are trying to orchestrate a deal, Reuters reported early Friday.
Another lifeline like the additional deposits that happened in March seems unlikely. It was enough then, but doesn’t look like enough now.
Alternatively, the FDIC could simply shut down First Republic and sell off the parts. Or the bank could be bought by others more immediately. State officials can make this easier by offering guarantees against losses. That’s what happened when UBS bought Credit Suisse in a regulator-brokered deal.
Authorities may be reluctant to do that, since it both puts taxpayers on the hook and gives the impression the government always bails out the banks when things start to go bad.
But the alternative could be worse. Back in 2008, it was then Treasury Secretary Hank Paulson’s refusal to sweeten the pot that scuppered a deal to buy out Lehman Brothers right before it collapsed. That may or may not have been a mistake, but it was certainly consequential, exacerbating the 2008/09 financial crisis.
The Biden administration is skeptical of a private-sector-only solution anyway, according to a separate report in the Financial Times.
This is the scene for what could be a very big weekend.
—Brian Swint
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House Investigating SVB Collapse as Regulators Report Findings
The House Oversight Committee is investigating the role of the Federal Reserve’s San Francisco regional bank and other state and federal banking regulators in Silicon Valley Bank’s collapse in March. Committee chairman James Comer (R., Ky.) told San Francisco Fed President Mary Daly it may have “failed to adequately supervise SVB.”
- The Fed and the Federal Deposit Insurance Corporation are preparing to release reports on the supervision of Silicon Valley Bank. They could propose new banking regulations related to the continuing fallout. The Fed’s report is due out this morning and an FDIC report is expected this afternoon.
- Fed Vice Chair for Supervision Michael Barr is expected to suggest regulations the Fed thinks should be strengthened. The FDIC will release three reports, including a comprehensive review of the deposit insurance system.
- Separately, banks borrowed more from the Federal Reserve for the second week in a row. The Fed said borrowing the week ending April 26 rose $11.3 billion. Small to midsize banks have used an emergency Fed program to prevent failures and stabilize the U.S. financial system.
- Meanwhile, the FDIC is expected to propose a special assessment on banks to repay losses to the deposit insurance fund after the FDIC covered uninsured deposits at SVB and Signature Bank, which also collapsed in March.
What’s Next: Elsewhere in the sector, Capital Alpha Partners analyst Ian Katz wrote in a note that the Fed could announce or signal a beefed-up bank stress-test program when it releases this year’s test results in late June.
—Janet H. Cho
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Amazon Erases Early Stock Bounce on Cloud Business Outlook
Amazon ’s shares initially rose 11% after-hours on Thursday after first-quarter earnings and revenue easily surpassed Wall Street estimates, but comments made during the conference call erased that gain. Executives said revenue from Amazon Web Services was slowing in the current quarter amid economic uncertainty.
- Cloud business AWS reported first-quarter net sales of $21.4 billion, up 16% from the same time last year. Chief Financial Officer Brian Olsavsky said customers are looking for ways to make the most of their current cloud spending. April revenue growth rates are lower than first-quarter trends.
- CEO Andy Jassy said the AWS business is witnessing companies spending more cautiously but said the company likes the fundamentals it is seeing. Big tech companies Microsoft and Alphabet reported improving cloud results this week.
- Amazon’s retail unit posted net sales of $51.09 billion, beating expectations, but flat from a year ago. Overall, Amazon’s quarterly revenue rose 9% to $127.4 billion. Advertising sales rose 21% to $9.5 billion.
- Amazon expects second-quarter net sales of between $127 billion and $133 billion, implying growth of between 5% and 10% from the second quarter of 2022, but in line with forecasts. The operating income forecast of $2 billion to $5.5 billion is below the midpoint of analysts’ estimates.
What’s Next: The e-commerce, cloud computing and streaming media company is cutting 27,000 jobs, the biggest in its 29-year history. The latest layoffs were announced Wednesday, affecting mostly employees in the human resources and AWS divisions.
—Ben Levisohn and Janet H. Cho
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Tesla Rival BYD Posts Profit Drop as Price War Heats Up
Chinese electric-vehicle maker BYD reported a 43% drop in profit in the first quarter compared with the end of last year as the market leader appeared to feel the impact of the ongoing price war being driven by Tesla.
- BYD posted first-quarter profit of 4.13 billion yuan ($596.5 million), a sharp fall from its fourth-quarter net profit of 7.3 billion yuan, which was a record high. However, the first-quarter profit was a 400% increase on the same period in 2022.
- Tesla has cut prices for its vehicles in China several times this year, as well as in other markets, in a bid to stimulate softening demand. BYD also reduced the tags on some of its models earlier this year, according to local media.
- The U.S. EV maker’s earnings met expectations last week but its gross profit margins fell below the significant 20% level, led by the company’s price cuts. CEO Elon Musk signaled more price cuts could be ahead.
What’s Next: Tesla’s aggressive pricing strategy is putting pressure on other EV auto makers, which risk losing market share unless they follow with their own reductions. Renault recently said Tesla’s price cuts are a “warning” to rival EV makers. But they seem to be driving demand in otherwise tough economic conditions.
—Callum Keown
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Lilly Will Seek FDA Approval For Weight-Loss Drug
Eli Lilly said a late-stage trial of its Type 2 diabetes drug Mounjaro found that patients lost a significant amount of their body weights, prompting it to seek approval from the Food and Drug Administration in the coming weeks. It could become the biggest weight-loss drug in history.
- Patients taking Mounjaro lost about 15.7% of their body weight. An FDA approval for weight loss could make the $1,000-a-month drug eligible for insurance coverage. Analysts estimate potential sales of $25 billion amid an explosion in demand for weight-loss medication.
- For the first quarter, Mounjaro sales beat expectations at $568.5 million. In contrast, Lilly’s overall earnings for the quarter came in below expectations, at $1.62 a share, and revenue was $7 billion, slightly above the consensus.
- Separately, AbbVie shares tumbled 8% after the biopharmaceutical company said first-quarter sales of its arthritis drug Humira dropped by 25.2% from a year ago amid competition from biosimilars in the U.S. and lost patent protection in Europe.
- Elsewhere in the sector, Merck ’s first-quarter financial results surpassed Wall Street expectations, and it raised its guidance for the 2023 fiscal year. Sales of Keytruda, Merck’s blockbuster cancer immunotherapy, jumped 20%. Sales of human papillomavirus vaccine Gardasil surged 35%.
What’s Next: Lilly is hoping FDA approval of Mounjaro for weight loss (it is only approved for diabetes now) could come by the end of the year as demand surges for rival treatments such as Ozempic and Wegovy from Novo Nordisk .
—Josh Nathan-Kazis and Janet H. Cho
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Snap, Pinterest Results Show Effects of Ad Market Uncertainty
Social media firm Snap said sales demand in the first quarter was “disrupted” by changes it made to its advertising platform to drive more click-through conversions, sending its stock down more than 20% in after-hours trading.
- Revenue dropped 7% to $988.6 million, slightly below expectations. The company said it was optimistic improvements to the ad platform would set the stage for growth down the road, but more disruptions will come in the second quarter.
- Snap projected second-quarter revenue in a range of $1 billion to $1.09 billion, with an internal forecast of $1.04 billion, implying a 6% decline from last year’s second quarter and below expectations.
- The company reported a 15% increase in daily active users to 383 million, though that was just shy of expectations, too. But it isn’t the only one struggling with ad revenue. At Alphabet -owned YouTube ad revenue dropped almost 3%. Snap also faces stiff competition for users with video-sharing app TikTok.
- Another social media platform, Pinterest , beat expectations Thursday and announced an advertising partnership with Amazon.com. Pinterest expects second-quarter revenue will be approximately in line with the growth it posted in the most recent two quarters. Shares fell 13%.
What’s Next: Pinterest Chief Financial Officer Todd Morgenfeld said the company doesn’t have visibility on when demand will start to accelerate, telling analysts on a conference call that the ad market continues to be uncertain because of the economic climate.
—Liz Moyer
This article was originally published in Barron’s on April 28, 2023. Image courtesy of iStock.
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