First Republic Bank’s FRC A-minus rating was placed on review for a possible downgrade by S&P Global Ratings on Tuesday, with the agency concerned about volatile deposit flows in the wake of the government’s closure of two banks in the last week. “Consequently, we expect the bank to increase wholesale borrowings to shore up its on-balance-sheet liquidity, which would likely weigh on its already modest profitability,” the agency said in a statement. S&P has placed the credit on CreditWatch Negative, with the latter reflecting the potential for its funding profile, revenue stability and profitability to deteriorate. While recent actions by federal regulators should improve bank access to liquidity, S&P is concerned that First Republic’s deposit levels may be volatile because it has a more concentrated deposit base, requiring increased use of more costly contingent liquidity. The bank said Sunday it has over $70 billion in contingent liquidity after a deal with JP Morgan Chase & Co. JPM and the Fed’s Bank Term Funding Program. “First Republic’s already modest profitability due to its loan portfolio being heavily weighted toward long-duration residential mortgages–which have fallen in fair value as interest rates have rapidly increased–may be hurt by the higher costs associated with the incremental wholesale funding,” said the statement. The bank’s stock was up 37% Tuesday in a partial rebound from selling in the past several days.
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