Hey r/investing! I recently read an article about JP Morgan's acquisition of First Republic Bank and thought I'd share my thoughts on the matter.
According to the article, JP Morgan's CEO Jamie Dimon and CFO Jeremy Barnum emphasized that the deal was not a fantastic one for their company, but rather a "modest" one that they took on out of a sense of duty. However, it seems like JP Morgan might be downplaying the actual benefits of this acquisition.
Here's a quick rundown of the deal:
- JP Morgan acquired $185.8 billion in assets from First Republic, including $29.6bn in securities, $150.3bn in loans, and $5.9bn of other items.
- In return, they assumed $172.8 billion in liabilities, consisting of $92.5bn in deposits, $28bn in Federal Home Loan Bank debt, $50bn in FDIC funding, and $2bn of other items.
- JP Morgan also made a cash payment of $10.6 billion to the FDIC.
This puts the "modest" accounting gain at a few billion dollars, which doesn't seem too shabby. But what's more interesting is the earnings power that this acquisition brings to JP Morgan.
The acquired loan book, which now holds loans at a discount to face value, provides a decent yield. Additionally, the FDIC takes on 80% of the losses in case of defaults, which reduces the amount of capital JP Morgan has to hold against the loans, ultimately increasing its profit margin.
Another intriguing aspect of the deal is the $50 billion in five-year fixed-rate funding from the FDIC. This helps lock in a good spread on the loans through 2028, and the structure of the loans ensures a profit for JP Morgan in the years following.
Although JP Morgan claims the deal will add around $500 million in net income annually, it seems they're being conservative with their estimates, as First Republic generated net earnings at an annualized rate of over $1 billion in its last reported quarter.
Overall, it appears that this acquisition is indeed a home run for JP Morgan, despite their insistence on its modesty. The FDIC may have taken a $13 billion hit on the deal, but with limited bidders capable of handling First Republic's balance sheet, it's clear that JP Morgan was in a strong position to take advantage.
As for the broader market, this deal raises questions about the potential stagnation of margins. If margins were to flatline, investors might have to accept less earnings growth than they've become accustomed to over the long bull market. This could be an important factor for investors to consider moving forward.
What are your thoughts on this acquisition and its implications for the market? Let's discuss!
Submitted May 02, 2023 at 01:37AM by browndroid https://ift.tt/FHs2c3N
