First Republic rebounds off record low amid talk of fresh aid plan

First Republic Bank surged by a record, leading a broad-based rally in U.S. lenders, amid discussions aimed at offering further support for the beleaguered lender.

The stock jumped 30%, bouncing off the record-low level at which it closed Monday, with fellow regional lenders including Western Alliance Bancorp and PacWest Bancorp also staging double-digit moves higher. The KBW Regional Banking Index surged by 4.8% for its biggest gain since January 2021, boosted by a broad rally across the sector.

First Republic extended its rally to a session high, gaining as much as 60%, following a Reuters report that the lender is looking at how it could downsize if attempts to raise new capital fail. Shares had earlier climbed on optimism over a new plan under discussion to aid First Republic. Under the plan, some or all of the $30 billion in deposits that a group of U.S. banks injected would be converted into a capital infusion.

A potential conversion “could add much needed stability and is another vote of confidence for the embroiled lender,” Bloomberg Intelligence analyst Herman Chan wrote.

The rally is part of a broader recovery in the banking sector across Europe and the U.S., as contagion concerns ease following UBS Group’s rescue deal for Swiss lender Credit Suisse Group.

Investor confidence in First Republic had waned after the lender was downgraded again Sunday by S&P Global Inc., days after the ratings firm cut the lender to junk. First Republic’s share price plunged over the past two weeks as depositors pulled back money after the failure of Silicon Valley Bank dented sentiment. 

The stock is still down more than 80% from the $115 level it traded at before Silicon Valley Bank’s woes.

Janney Montgomery Scott analyst Timothy Coffey lowered his fair value estimate for the shares to $10 from $40 in a Tuesday note before the Reuters report of possible downsizing, while keeping a neutral rating.

“We believe a capital raise would alleviate some stress from FRC,” the analyst wrote. “We also believe FRC faces substantially higher interest expenses from replacing deposit outflows with borrowings and higher cost deposits.”

Major Wall Street lenders also joined in on the Tuesday rally, with Citigroup Inc., Wells Fargo & Co. and Bank of America Corp. all rising more than 2% each.

U.S. officials are mulling ways they could temporarily expand Federal Deposit Insurance Corp. coverage to all deposits if the crisis grows, Bloomberg News reported, citing people with knowledge of the talks.

Treasury Secretary Janet Yellen said the government could repeat the drastic actions it recently used to protect depositors if smaller banks are threatened.