The banking space sees another rescue deal in just a matter of days, with the nation’s biggest banks agreeing to deposit around $30 billion with troubled First Republic Bank (FRC). The big banks -including JPMorgan (JPM), Bank of America (BAC), Citi (C) and Wells Fargo (WFC) – will contribute $5 billion of deposits each. Goldman Sachs (GS) and Morgan Stanley (MS) will provide $2.5 billion each. PNC Financial (PNC), BNY Mellon (BK), Truist (TFC), U.S. Bancorp (USB) and State Street (STT) will each contribute $1 billion.
Market reaction: While investors initially cheered the news, First Republic’s shares reversed course after the lender said it was suspending its dividend. It said it is “focused on reducing borrowings and evaluating the composition and size of its balance sheet going forward.” Billionaire investor Bill Ackman denounced the rescue deal, saying, “Spreading the risk of financial contagion to achieve a false sense of confidence in FRB is bad policy.”
Background: First Republic is exploring strategic options to improve its liquidity, including a potential sale, amid significant deposit outflows following the collapse of Silicon Valley Bank (SIVB). Ratings agency S&P cut the bank’s rating to junk on outflow risks and net interest margin pressures.
SA commentary: Contributor Yannick Frey believes the sharp decline in the regional banking sector presents a prime buying opportunity, but only for investors who can handle the strong price volatility. As for First Republic, its “risk management is favorable because it does not invest in exotic derivatives, does not invest in junk bonds, does not issue credit cards or auto loans, and has no negative repayment loans.” (294 comments)
Market expectations have skewed firmly towards a 25-basis point rate hike by the Federal Reserve at its monetary policy meeting next week. The shift has been spurred by recent turmoil in the financial sector and the European Central Bank’s decision to hike rates by 50 basis points yesterday. The ECB’s move came amid calls for central banks on both sides of the Atlantic to dial back on policy tightening in light of the banking crisis. Ahead of the release of the ECB’s decision, markets were pricing in a 56.8% probability of a 25-basis point hike by the Fed next week, according to the CME FedWatch Tool. The probability of no hike was at 43.2%. Today, the probability of a 25-basis point hike stood at 79%, with 21% probability of no hike. “The larger issue of protecting the banking system and the economy takes center stage. The Fed will have to fine-tune between fighting inflation and over-tightening,” said SA contributor Fountainhead. (25 comments)
Microsoft (MSFT) submitted remedies to the European antitrust regulator for its planned $69 billion acquisition of videogame giant Activision (ATVI) as it tries to win the regulator’s approval. The European Union deadline to rule on the Activision deal has now been extended to May 22 after the concession offer was made on Thursday, according to the EU regulator’s website. Details of what remedies were offered weren’t provided. Microsoft is expected to secure EU approval, thanks to its offers to license videogames to its competitors. However, most investors are focused on the U.K.’s antitrust authority’s decision as the deal has faced backlash in the country. SA contributor Bohdan Kucheriavyi called the Activision deal a gamechanger, but flagged the risk of the acquisition being blocked by regulators.
Sanofi (SNY) slashed prices for Lantus, its widely-prescribed insulin, in the U.S. by 78%, effective from January 1, 2024. It will also establish a $35 cap on out-of-pocket costs for Lantus for all patients with commercial insurance. The move follows other drugmakers that reduced prices for their insulin products, bowing to widespread pressure over the costliness of the critical diabetic therapy. Novo Nordisk (NVO) will slash the U.S. list prices of several insulin products by up to 75%. Eli Lilly (LLY) is cutting the prices of its insulin drugs by 70% and introducing a program that will cap out-of-pocket expenses at $35 per month. Earlier this month, U.S. Senator Bernie Sanders unveiled a bill that would limit the list price of insulin at no more than $20 per vial. (8 comments)
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