First Republic Bank downgraded to junk by S&P and Fitch on risk of clients pulling deposits in the wake of SVB failure

• First Republic Bank's credit ratings were cut to junk status at S&P Global and Fitch on Wednesday. 
• Each agency sees risks in depositors pulling their funds after Silicon Valley Bank's failure. 
• Fitch said First Republic's deposits hold risks in concentrating on wealthy, coastal clients. 

First Republic Bank's credit rating was cut to so-called junk status at S&P Global Ratings and Fitch Ratings on Wednesday, with the agencies citing risks that customers will withdraw funds from the San Francisco-based lender. 

The downgrades arrived during a frenzied time of trading in shares of First Republic Bank and other regional banks after last week's seizure of Silicon Valley Bank by regulators.

That lender's clients rushed to pull their deposits after learning a jump in interest rates spurred billions in losses in SVB's bond holdings. Since then, the federal government has rolled out a new liquidity mechanism to help prevent a run on other US banks.

"We believe the risk of deposit outflows is elevated at First Republic Bank despite the actions of federal banking regulators and the bank actively increasing its borrowing availability to mitigate risk associated with the bank failures over the last week," wrote S&P Global Ratings analysts Nicholas Wetzel and Rian Pressman. 

S&P cut First Republic's long-term issuer credit rating to BB+ from A-. The BB+ rating is considered a "junk" classification of debt, meaning it's not investment grade. S&P said all of its ratings on First Republic are on "negative" credit watch, signaling further downgrades are possible. 

Meanwhile, Fitch Ratings downgraded its long-term issuer default rating on First Republic to BB from A- and placed it and other ratings on negative watch. It described First Republic's deposit base as "concentrated" with a strategic focus on wealthy and financially sophisticated customers in some urban coastal markets. 

"This not only drives a high proportion of uninsured deposits as a percentage of total deposits but also results in deposits that can be less sticky in times of crisis or severe stress," said Fitch. 

First Republic's latest 10-K filing indicated 68% of its roughly $176 billion in deposits at the end of 2022 was uninsurable by the FDIC. The FDIC historically has insured deposits up to $250,000, but it guaranteed SVB's beyond that limit. 

Fitch added that First Republic's investment portfolio is relatively concentrated in long-dated municipal securities, affording it less flexibility. Overall, about 61% of the book value of the portfolio is comprised municipal securities, which is high compared with industry standards.

First Republic on Sunday said its liquidity position "remains very strong," and disclosed in a previous regulatory filing it had received $70 billion of liquidity from the Federal Reserve and JPMorgan Chase. 

Shares of First Republic fell 17% after coming off a trading halt earlier Wednesday. The shares began plunging last Thursday amid SVB's bank run, leaving them down by 59% through Tuesday's session. 

Investors have also set their sights on other regional banks, including PacWest, on concerns their balance sheets pointed to similar risks of deposit runs. Fitch on Wednesday placed PacWest on a negative rating watch.