PacWest Bancorp led a rebound across US regional banking stocks after a week of losses, amid signs some of the selling has been overdone.
PacWest shares rose as much as 96% in US trading Friday, their biggest intraday gain ever, amid multiple trading pauses due to volatility, while Western Alliance Bancorp rose 59%. Charles Schwab Corp. , whose huge banking unit was an exporter to investor concern, added 6.1% after the update showed outflows slowing for a third month. Other overdraft lenders recovered some losses as well, with Zions Bancorp up nearly 23% and Comerica Inc. by up to 18%.
Regional banks have been gripped by turmoil since early March amid fears that large unrealized losses on bond investments could push some over the edge, and four banks have collapsed. Investors also focused on banks’ high exposure to mortgage lending and deteriorating deposits as customers sought higher-yielding alternatives.
The government’s seizure and sale of First Republic Bank earlier this week and a a report That Backoist was exploring strategic options revived market jitters on Thursday, sending peers back. The rout extends to the largest lenders, with the KBW Bank index down 11% this week through Thursday. The benchmark index rose as much as 4.8% on Friday, with the KBW Regional Lenders Index up 5.1%.
While some investors, including billionaire hedge fund billionaire Bill Ackman, have warned that there could be more pain ahead, others said the downturn has gone too far. “It’s difficult to reconcile the tension between weak market sentiment and strong regional bank liquidity as investors take a very hawkish view of banks’ capital and operating models,” said Herman Chan, an analyst at Bloomberg Intelligence.
The weekend rally could cause some pain for short sellers seeking profits from the ongoing slowdown in regional banks. Banking analysts at Wells Fargo led by Mike Mayo pointed to a variety of catalysts for a short-term rally, including potential actions by the government such as increased guarantees for deposits and temporary restrictions on short selling.
‘government concern’
“Shorting can help with liquidity, price discovery, and checks and balances in capital markets, especially given the upward bias,” Mayo wrote in a note to clients. “However, in the current situation with the regional banks, the government’s concern appears to be that the extent of market commentary is driving the outcome more than would be normal.”
In a note Friday morning about upgrading Western Alliance, Comerica and Zions to overweight, JPMorgan analyst Stephen Alexopoulos said the sell-off has fed into itself. “With such negative sentiment, in our view, it wouldn’t take much to see a significant medium-term positive reclassification of regional bank stocks,” he wrote.
Meanwhile, Wedbush dropped Western Alliance from its list of best ideas via equity research less than three weeks later, albeit with some inconsistency. Pulling the stock from the list in a note on Friday, the securities firm noted “investment price discipline” for a change, while still rating the stock for Outperformance. “I didn’t want to remove WAL from the list but our internal rules call for removal,” analyst David Chiaverini said via email.
Shares of PacWest plunged 51% Thursday in their worst single-day loss ever, after the Beverly Hills-based lender confirmed it had in conversations With many potential investors. The Western alliance declined by 38 percent, reversing an earlier drop after it denial Report that it explores strategic options.
Pessimism has become so indiscriminate that Pacific West Bancorp, a small lender based out of Portland, Oregon, felt compelled to issue a statement reminding everyone that “separate entity without affiliation” with the similarly named PacWest.
While it’s risky to buy into such dips – “catching a falling knife” in Wall Street parlance – analysts at Hovde Group said a market bottom could be within reach.
“A knife caught in the moment can at least be dull,” the company wrote in a note to investors. “Given our view that there is nothing fundamentally new going on with the deposits of the banking system (other than the already known movement from low-cost sources), we believe that investors can be handsomely rewarded.”
In what could be a relief for small lenders, Bloomberg News mentioned Thursday that the Federal Deposit Insurance Corporation is preparing to exempt them from paying additional money to replenish the Deposit Insurance Fund. The report said those with assets of less than $10 billion would not have to pay up.
FDIC renewal
The FDIC plans to issue a highly anticipated proposal next week to refill the fund, which has been depleted in part by the failure of the Silicon Valley bank and signature bank, people familiar with the matter said.
Equity trades betting on regional lenders have generated up to $7 billion in paper profits so far this year, according to research by S3 Partners. But some experts said a potential policy fix might put an end to the brief jams.
“While it’s hard to see a catalyst for regional banks to turn around right now, it’s a very popular and very crowded sell that could be due to stress at some point,” said Chris Murphy, co-head of derivatives strategy at Susquehanna. international group.
In an effort to calm jittery investors, Backwest said this week that core deposits have risen since March and “has not seen unusual deposit inflows following the sale of First Republic and other news.” The company said insured deposits rose to 75%.
The Western alliance said it did not see unusual inflows of deposits after the collapse of the First Republic. The company said insured deposits accounted for more than 74% of its total.