© Morgan Lieberman/Bloomberg
A Pacific Western Bank branch in Los Angeles.
A pair of regional banks took a pounding from investors on Thursday, as the banking crisis approached the end of its second month with little sign that the turmoil was nearing an end.
Shares of PacWest Bancorp lost more than half their value, after the company issued a statement overnight saying it was in “ongoing” discussions with partners and investors. The stock, which traded near $27 per share before the March 10 collapse of Silicon Valley Bank, closed at $3.17.
Western Alliance, a regional lender based in Phoenix, saw its shares tumble by more than 38 percent. Both banks said their deposit totals remained robust.
Several other regional institutions, such as Comerica, Zions Bancorp and Metropolitan Bank Holding Corp., suffered lesser share price declines. But the market action came days after federal regulators shuttered regional lender First Republic and sold it to JPMorgan Chase, which many analysts hoped would stop the bleeding.
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On Wednesday, Federal Reserve Chair Jerome H. Powell pronounced the banking system “sound and resilient,” echoing remarks earlier in the week from JPMorgan CEO Jamie Dimon, who told reporters the industry was “getting near the end” of the crisis.
“The market is just moving on from First Republic, looking for the next weakest gazelle,” said David Smith, a banking analyst with Autonomous Research.
Amid the turmoil, First Horizon, another regional lender, and TD Bank Group of Canada said they had called off their $13.4 billion merger. TD said it had informed First Horizon it was having trouble securing regulatory approvals for the deal.
First Horizon shares lost more than one-third of their value, and TD, which will pay its jilted partner $200 million, saw its shares rise by almost 1 percent.
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Three regional banks have failed in the past seven weeks, among the most prominent victims of the Fed’s rapid interest rate increases, which continued Wednesday. To fight inflation, the central bank has raised borrowing costs over the past 14 months at its fastest pace since the early 1980s.
Tighter credit has forced investors to rethink the risks they take with their money. The most vulnerable banks are those with a customer base concentrated in a single industry, such as technology or venture capital, said Steven Kelly, senior researcher at the Yale Program on Financial Stability.
“It’s banks that look like SVB. It’s about the business model,” he said.
Neither PacWest nor Western Alliance seem to be suffering from a classic bank run of the sort that felled SVB, according to their most recent financial statements. The California bank lost $40 billion in deposits in a single day and told regulators it expected to lose an additional $100 billion the next day, hours before state officials shut it down.
There is no public indication of a similar exodus at either of the banks that investors hammered Thursday.
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PacWest said its $28 billion in deposits on Wednesday were higher than at the end of March. Insured deposits represented 75 percent of the total, up from 73 percent on April 24, the bank said.
Likewise, Western Alliance said it held $48.8 billion in deposits on Tuesday, up marginally from $48.2 billion one day earlier. Almost three-quarters of its deposits are covered by federal insurance, the bank said.
A bank’s share price typically does not affect its business operations. The risk amid the current unsettled climate is that depositors react to a plunging stock by withdrawing their funds.
“It’s really an issue of perception and the extent to which it carries over to deposits,” Smith said.
Western Alliance, the nation’s 40th largest commercial bank with about $68 billion in assets, was hurt Thursday by a Financial Times report that the bank was considering a sale of some or all of its business. The company’s share price fell by about 60 percent before recovering after the bank called the story “categorically false in all respects.”
“There is not a single element of the article that is true,” it added.
Western Alliance accused the Financial Times of allowing itself to be used by “short sellers,” investors who bet that a stock will decline.
There is no sign at this point that the survival of either bank should be in doubt, Smith added.
But efforts by the troubled regional banks to build a firewall of fresh capital are battling a lack of investor confidence.
PacWest said it is trying to sell a $2.7 billion loan portfolio. The bank also said it is considering unspecified strategic options.
“Recently, the Company has been approached by several potential partners and investors — discussions are ongoing,” the bank’s statement reads. “The company will continue to evaluate all options to maximize shareholder value.”
Western Alliance said a planned sale of $6 billion in assets remains “on track” and should be concluded “in the coming weeks.”
Attracting investors to take an ownership stake in a regional bank would be a tough sell, Kelly said. Michael Barr, the Fed’s vice chair for supervision, said last week that “stronger standards” were needed for regional banks.
New rules for handling risks involving interest rate changes and uninsured deposits appear likely, which analysts expect to dent bank profits.
“Who wants to put capital in a bank that looks like SVB? There’s no business there,” he said.
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There seems to be little that Washington can do to calm spooked investors.
In March, following SVB’s failure, the Fed established a new lending program allowing banks to obtain unlimited loans by pledging as collateral ultrasafe assets such as Treasury securities.
The move was designed to spare banks from having to engage in a fire sale of assets that had lost value as a result of the Fed’s interest rate increases. Unlike its normal bank lending, the Fed offers the loans for up to one year and will value the pledged securities at their original value rather than their depressed market price.
Banks have tapped the Fed’s traditional “discount window” and the new loan program for a growing amount of money. As of April 26, banks had borrowed $155 billion, up from about $144 billion one week earlier.
“Investors are asking what Washington can do about these regional bank stocks plummeting, and the answer isn’t clear,” said Ian Katz, managing director for Capital Alpha Partners. “I think there would have to be a lot more bank closings for Congress to even start moving.”
