JPMorgan has acquired First Republic for over $10bn as the latter bank became the latest casualty in the wave of US banking instability. The acquisition is one of the rare times JPMorgan is able to grow domestically, and includes the added attraction of First Republic’s HNW client relationships.

First Republic faced over $100bn in deposit withdrawals in the first quarter of 2023 as its assets suffered amid the rising rate environment. Its focus on HNW clients left a large proportion of its deposits above insurance thresholds, generating panic.

The acquisition of the struggling bank will not bring substantial gains to JPMorgan from a balance sheet perspective. However, First Republic’s model of targeting HNW business may hold substantial strategic value. Wealth management divisions are in fashion at large banks as executives realize their capital-light model can provide consistent and superior return on equity compared to more market-dependent divisions. As such, big names including Morgan Stanley are investing heavily in their development.

JPMorgan’s acquisition of First Republic is no different, boosting its wealth division assets under management by 10%, adding nearly 150 wealth advisors to its arsenal, and incorporating new perspectives from a bank renowned for its customer service. Each side will have the opportunity to develop and learn from the other’s practices, which should lead to improved services.

The synergetic opportunities are self-explanatory as JPMorgan’s sheer size and product range can now combine with the existing relationships of the First Republic team to deliver robust growth. JPMorgan will utilise First Republic’s branch network in desirable locations – such as Los Angeles and New York City – to maximize private banking services for HNW clients, building upon the existing relationships of the failed lender. Despite the risks of integration and threats from taking on a failed entity, this looks to be an astute purchase.

Despite this, there are challenges ahead in getting the most from this new purchase as integration of such a different model into the JPMorgan umbrella will cause frictions. From the end of February 2023, advisors fled First Republic en masse amid the onset of the bank’s troubles – but many chose rivals ahead of the world’s largest lender. This both diminishes the competitive advantage gained from the purchase (as rivals will acquire similar information and connections from earlier departees) as well as the scale of the acquired division. Further, this may induce a further loss of assets as wealth clients tend to choose their provider based on advisors’ relationships with them or their business. As per GlobalData’s HNW Targeting and Retention Analytics 2022, 22% of HNW customers chose their current providers based on one of these two connections.

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Additional challenges will come from changes to practices that First Republic customers have become accustomed to. JPMorgan has announced it will not be renewing clients’ personal credit lines as this is not a service traditionally offered by the bank. However, such preferential and generous credit facilities (in addition to loans and mortgages) are exactly what lured many of First Republic’s customers. Changing such a fundamental part of the business model may reduce the effectiveness of the bank’s purchase.

Despite the potential of the deal to help JPMorgan grow its wealth management capabilities, the integration of such a fundamentally different business model will be extremely challenging. Only time will tell if this purchase carries the upside that CEO Jamie Dimon expects, but the acquisition ultimately has very few drawbacks for such a large institution.