PacWest Bancorp led a rebound across US regional banking stocks after a bruising week of losses, amid signals that some of the selling has been overdone.
(Bloomberg) — PacWest Bancorp led a rebound across US regional banking stocks after a bruising week of losses, amid signals that some of the selling has been overdone.
PacWest’s shares gained as much as 40% in US trading on Friday, while Western Alliance Bancorp rose 30%. Charles Schwab Corp., whose massive banking unit has been a source of investor concern, added 4.7% after an update showed outflows slowed for a third month.
Turmoil has engulfed regional banks since early March amid concern that big unrealized losses on bond investments might push some of them to the brink, and four did collapse. Investors have also focused on banks’ high exposure to real estate lending and sinking deposits as customers sought out higher-yielding alternatives.
The government’s seizure and sale of First Republic Bank earlier this week and a report that PacWest was exploring strategic options revived market nervousness on Thursday, sending peers tumbling. The rout spread to bigger lenders, with the KBW Bank Index down 11% this week through Thursday. The benchmark added as much as 3.65% Friday, with KBW’s index of regional lenders up 4.3%.
While some investors including hedge fund billionaire Bill Ackman have cautioned that there could be more pain to come, others said the plunge has gone too far. “The tension between poor market sentiment and strong liquidity at regional banks is difficult to reconcile as investors take a draconian view of banks’ capital and operating models,” Bloomberg Intelligence analyst Herman Chan said.
PacWest shares dropped 51% on Thursday in its worst one-day loss on record, after the Beverly Hills-based lender confirmed it’s in talks with several potential investors. Western Alliance slumped 38%, paring an earlier drop after denying a report that it’s exploring strategic options.
The pessimism became so indiscriminate that Pacific West Bancorp, a small lender based outside Portland, Oregon, felt impelled to issue a statement to remind everyone that it’s “a separate entity with no affiliation” to the similarly named PacWest.
While it’s risky to buy into such plunges — “catching a falling knife” in Wall Street parlance — analysts at Hovde Group said a market bottom might be at hand.
“The knife being caught presently could at least be dull,” the firm wrote in a note to investors. “Given our view there is nothing new fundamentally occurring with bank system deposits (other than the already known movement from lower-cost sources), we believe investors could be handsomely rewarded.”
In what could come as a relief for smaller lenders, Bloomberg News reported Thursday that the Federal Deposit Insurance Corp. is poised to exempt them from kicking in extra money to replenish the deposit insurance fund. Those with less than $10 billion in assets wouldn’t have to pay, the report said.
FDIC Replenishment
The FDIC is planning to release as soon as next week a highly anticipated proposal for refilling the fund, which was partly depleted by the failures of Silicon Valley Bank and Signature Bank, people familiar with the matter said.
Equity trades betting against regional lenders have netted about $7 billion in paper profits so far this year, according to research by S3 Partners. But possible policy remediation may bring an end to those crowded shorts, some experts said.
Read more: Short Sellers Targeting US Banks Are Risking a Painful Squeeze
“While it’s hard to see a catalyst to turn around the regional banks right now, it is a very popular and very crowded short which might be due for a squeeze at some point,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.
In a bid to calm antsy investors, PacWest this week said 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.” Insured deposits rose to 75%, the firm said.
Western Alliance said that it hasn’t seen unusual deposit flows following First Republic’s collapse. Insured deposits represent over 74% of its total, the company said.
–With assistance from Joanna Ossinger, Ishika Mookerjee, Michael J. Moore and Bre Bradham.
(Updates with opening share prices)
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