JPMorgan’s Acquisition of First Republic Bank Satisfies Regulators, Investors
Deal expected to generate $500 million in annual net income for JPMorgan, immediate profitability looks likely.
JPMorgan Stock at a Glance
- Fair Value Estimate: $146
- Star Rating: 3 stars
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Wide
JPMorgan acquires First Republic Bank
JPMorgan Chase JPM has acquired First Republic Bank FRC from the FDIC, effectively zeroing out First Republic equityholders. Because First Republic is no longer a separately traded entity, we are dropping coverage. We had assigned a very high probability (84%) that its shares were worth zero well over a month ago and actually dropped our fair value estimate to $0 last week. We were at the low end on the Street in both instances.
The transaction appears to be a good deal for JPMorgan, which will assume all of First Republic’s deposits and take over much of its assets after the latter was closed by the FDIC. JPMorgan had to pay an additional $10.6 billion to the FDIC as part of the asset assumption, while the FDIC estimates that the cost to the insurance fund will be around $13 billion. We think the key point overall is that the depositors are being made whole, which satisfied the regulators.
With the deal expected to generate an additional $500 million in annual net income for JPMorgan, it looks as if the bank is going to be able to immediately make the balance sheet profitable by reworking the funding side of things. We would guess that the FDIC helped with this effort by providing $50 billion in fixed-rate funding for the deal (although the exact rate for the funding was not disclosed).
The key strategic benefit for JPMorgan, in our view, will be the boost to its wealth business and the potential client relationships it can keep as part of the takeover. The key risk will obviously be retention of First Republic’s clients as well as its advisor talent. While there are some other risks associated with the transaction, this seems like a good deal overall for JPMorgan, as the bank is estimating an internal rate of return of over 20%. That is a good number, in our view, and above several of the more recent deals we’ve seen in our coverage.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.