PacWest, First Horizon Slump, Reigniting Regional Bank Jitters

PacWest Bancorp and First Horizon Corp. led a renewed slide in US midsized lenders, adding fresh worries to a sector that has been rattled in recent months by the collapse of multiple firms.

(Bloomberg) — PacWest Bancorp and First Horizon Corp. led a renewed slide in US midsized lenders, adding fresh worries to a sector that has been rattled in recent months by the collapse of multiple firms. 

Investors are once again on edge, with PacWest plunging by as much as 48% in premarket trading after confirming it’s in talks with potential investors and partners. First Horizon tumbled as much as 55% after saying it and Toronto-Dominion Bank mutually agreed to terminate their merger agreement amid uncertainty around regulatory approvals. The SPDR S&P Regional Banking ETF sank as much as 5.9%, extending this week’s skid.

The slide comes as prominent investors including hedge fund billionaire Bill Ackman warn that stresses on the banking system are far from over. It also puts in focus concerns that policy makers need to do more to shore up smaller lenders that have suffered as the Federal Reserve raised interest rates. Fed Chair Jerome Powell Wednesday said that the government seizure and sale of First Republic Bank to JPMorgan Chase & Co. was “an important step toward drawing a line under that period of severe stress” for regional lenders.

“Confidence in a financial institution is built over decades and destroyed in days,” Ackman, chief executive officer of Pershing Square, said on Twitter. “As each domino falls, the next weakest bank begins to wobble.”

Smaller lenders are facing a pinch as rising interest rates lower the value of their longer-term investments while increasing the cost of funding. That’s been spurring depositors to move cash into higher-yielding money market funds. Still, some analysts caution that the plunge has gone too far, reflecting more concern that is justified by fundamentals.

“We believe the recent sell off in regional bank stocks is overdone as price action has been disconnected from fundamentals,” Truist Securities analyst Brandon King wrote in note. “While we continue to acknowledge challenges ahead from funding costs and normalizing credit losses; first quarter results and the stabilization of deposits should have eased investor concerns of a more stressed situation, in our view.”

PacWest said in a statement that core deposits have risen since March and it “has not experienced out-of-the-ordinary deposit flows following the sale of First Republic Bank and other news.” DA Davidson downgraded its recommendation on the stock to neutral from buy, saying the stock has become “untethered from fundamentals” and that the deposit trends of late March and early April are being ignored given the market’s conditions.

Western Alliance Bancorp, which was down as much as 25%, also said it hasn’t seen unusual deposit flows following First Republic’s collapse.

 

Larger US lenders were also pulled lower. Wells Fargo & Co. slipped 1.6% and Goldman Sachs Group Inc. dropped 0.6% as its role in Silicon Valley Bank’s attempt to raise funds in March is under review in a US probe.

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