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JP Morgan Banks First Republic - Astute Market Overview - 2nd May 2023



Hello, and welcome to the Astute Market Overview of the last week.

In our Q1 quarterly commentary, the Astute Investment Management team wrote about some of the outcomes of increasing interest rates, largely focussed on what we have dubbed a mini-bank crisis. You can read the full detail in our quarterly commentary.

Well, the commotion continues. Following the collapse of Silicon Valley Bank (which you can read about here) the markets’ attention turned to weeding out the next weakest bank, and eyes have been on First Republic for some time.

At the top of last week, First Republic (a mid-sized US bank) reported its first quarter earnings, which fell short of estimates. Their deposits plummeted by $104.5 billion in the first quarter, as clients withdrew their money from small to mid-sized banks following the collapse of both Signature and Silicon Valley Bank. Generally, the Federal Deposit Insurance Corporation (or FDIC) will cover deposits of up to $250,000; this means that as bank run fears spread, many customers with deposits over the limit, withdraw.

By the end of last week, First Republic went into the possession of the regulators, and at the start of this week (ironically a bank holiday for us in the UK) a bid was accepted from JP Morgan Chase to assume all deposits and the majority of assets of First Republic Bank, with the FDIC absorbing some of the losses.

To pinch an abstract from our Chief Investment Officer letter – there’s no better, or perhaps I should say worse, representation of sentiment driven markets than the fear associated with a banking run. No business can survive if its customers decide wholesale to stop purchasing its products, but only in banking is that force so acutely felt. Trust is a fragile thing at the best of times, and the implicit promise that money in the bank is safe remains in the shadow of the global financial crisis. When doubts emerge, trust evaporates and even a perfectly good bank can quickly find itself in trouble.

The Federal Reserve will be considering these developments, and the impacts of increasing interest rates as I record, with the Fed meeting right now (in a prescheduled meeting) to decide and deliver their interest rate decision.

To paint the full picture, in the game of increasing interest rates, some banks have managed to – thus far – avoid the snakes and land on ladders every time.  JP Morgan (the largest US bank who are now acquiring deposits and assets of First Republic) released their Q1 earnings earlier last month, with an increase in net income of 50% year on year, bolstered by $20.8 billion in net interest income, thanks to the current monetary policy environment. The increase in key interest rates in the US mean the bank can benefit from an increased spread – the difference between the rates charged on debt, and what is paid to depositors.

Furthermore, Q1 Profits from Deutsche Bank released last week came in the highest in a decade, with pre-tax profit of 1.9bn euros. In the UK, Barclays profits came in at a 12 year high.

In a change to our regular programming, we’ll take a week’s break from the Astute Market Overview. Of course, should anything happen that we deem is update-worthy, we’ll be sure to provide you with one. See you next time.

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