The last-ditch acquisition of the failing First Republic Bank by JP Morgan Chase & Co. should pay off for JP Morgan, but there are risks to the deal, says Fitch Ratings.
After being taken into receivership by the FDIC, First Republic was acquired by JP Morgan in a deal that includes approximately US$173 billion worth of loans, US$87 billion in deposits and US$30 billion of securities.
“The acquisition could create revenue and cost synergies for JPM and should accelerate its wealth management strategic initiatives and bolster its franchise,” the rating agency said in a report.
However, the payoff could be negatively impacted by attrition in First Republic’s financial advisors and clients over time.
In the short term, however, “the downside risks to this transaction appear manageable,” Fitch said.
To start, the deal is small relative to JP Morgan’s total size, it said: the bank estimates the deal should add US$500 million to annual earnings, compared to JPM’s $37.7 billion of net income in 2022..
The downside is also limited by the FDIC agreeing to share losses on First Republic’s residential mortgage loans for seven years and commercial loans for five years.
JP Morgan also marked down First Republic’s loan portfolio to reflect the impact of prevailing interest rates, which Fitch said should further minimize the risks of the deal, and its impact on capital.