First Republic Bank: The last US bank to fall?

Another day, another bank failure - well, not to that extent, but it is the fourth regional lender to collapse in the US since early March. On 1 May 2023, California-based First Republic Bank went under, making it the second-largest bank failure in US history (knocking Silicon Valley Bank into third position). JPMorgan subsequently won an auction to buy over the bank for $1.9 billion only!

Ultimately, First Republic was another casualty of rapidly higher interest rates triggered by the Fed's battle against inflation. The pointers put forth in our earlier updates on Silicon Valley Bank and Credit Suisse continue to hold true today (do refer to the articles for further details).

We've observed contagion risks being contained so far. But be prepared, as this is likely not the end of the story. More volatility is expected going forward, especially as the Fed is widely expected to raise (its final?) interest rates by another 0.25%  and perhaps pause its steps, which will be positive for the overall market. The man on the street need not worry too much - depositors are safe…but it is a different story if you had invested in one of those financial institutions that have gone down, and those that are going to go down.

If you're still worried, you may want to pay more attention to JPMorgan's CEO Jamie Dimon. He is optimistic, saying on an analyst call after taking over First Republic that “there may be another smaller one [bank failure], but this pretty much resolves them all.” Of course, big banks like his are benefitting in this environment, acting like an opportunistic investor on the prowl for opportunities. As an investor, you may also do the same by topping up regularly during this period.  

Rest assured, however, our portfolios have not suffered any permanent capital loss. We remained well prepared for such uncertain times so that our investors can ride through the market volatility and enjoy the eventual recovery that always follows such periods.

In fact, all the portfolio saw a rise in their value, thanks to the idea that increasing rates might force more failure, keeping the US Federal Reserves stay their hands on any rate hikes. This buoyed the entire financial market that the end of rate rise might be near at an end.

Portfolio Performance

The portfolio saw a positive gain for the month as April as both the general equities and bonds rallied. The cash portfolio saw a gain of +0.76%, CPFIS +1.96% and SRS +1.62%. The cash portfolio performance was dragged down by Royce US Small Cap as investors are worried that small and medium companies that bank with the smaller US banks may suffer as a result of the other possible small and medium bank failure. However, I do not see this trend to continue as the US Federal Reserve has effectively backstopped future failures and the fund will recover quickly once confidence in the US banking market recovers.

There is no change in the portfolio as we continue to see good gains from all the markets that we are invested in.