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Turmoil in Regional Banking Sector Amid Fears of Financial System Instability

On Tuesday, PacWest Bancorp and Western Alliance Bancorp led a significant decline in regional lenders as renewed concerns over the financial system’s health impacted Wall Street following the second-largest US bank failure. As a result, trading in both companies experienced multiple volatility halts, with PacWest plunging 28% to close at a record low and Western Alliance dropping 15%. 

The two firms have lost over $5 billion in market value this year. The KBW Regional Banking Index fell 5.5% on Tuesday, the largest decline since the crisis involving Silicon Valley Bank in March.

Charles Schwab Corp. and Other Banks Under Pressure

Charles Schwab Corp., a brokerage firm with a banking arm that has faced challenges in the recent downturn, saw a 3.3% decline amid the broader selloff in financial stocks. Comerica Inc. and Zions Bancorp plummeted over 10%, while Metropolitan Bank Holding Corp. experienced a 20% drop.

The upheaval occurred a day after JPMorgan Chase & Co.’s Jamie Dimon stated that the current banking crisis is nearing its conclusion after his bank acquired First Republic. However, he acknowledged that it is possible another small lender could fail. The regional bank index has already decreased 28% this year.

In an interview, Wells Fargo & Co. analyst Mike Mayo commented, “The resolution of First Republic helps to ease concerns but not eliminate them.” He added that regional banks are impacted by a “triple dose of negative sentiment,” which includes commercial real estate, diversification, and regulation.

Focus on Western Alliance and PacWest

Western Alliance and PacWest are among several regional banks that have caught investors’ attention after the collapse of Silvergate Capital Corp., SVB Financial Group’s Silicon Valley Bank, and Signature Bank in March. These events highlighted the risks faced by commercial lenders due to asset-liability mismatches and uninsured deposits.

However, both Western Alliance and PacWest reported earnings results in April that seemed to reassure investors, as they indicated that their deposit bases had stabilized or recovered after the initial outflows in March.

Edward Moya, Oanda senior market analyst, stated, “Wall Street is wondering which bank could be the next one that needs a rescue and that is making it easy to pick on the other regional banks.” He added, “It looks like JPMorgan’s deal for FRC gave us one day of calm for the banking sector. However, regional banking stocks are still vulnerable until we see clear signs that emergency lending programs can go away.”

RBC Capital Markets Analyst’s Recommendation

Jon Arfstrom, an analyst at RBC Capital Markets, noted that the Tuesday fluctuations in regional bank stocks were unusual and that his conversations with investors did not reveal any new concerns. He advised buying the dips in stocks, including Comerica, PacWest, and Western Alliance.

Arfstrom wrote, “In our view, unwarranted negative sentiment continues to drive elevated moves in these stocks.” He added, “Our sense is that today’s action is an amplification of ongoing fears as the market looks to digest the implications of the First Republic resolution and an overall more challenging longer-term profitability outlook for the industry.”

Gary Tenner, an analyst at DA Davidson, pointed out that part of what is driving bank shares down is that many regional bank investors assumed the Federal Deposit Insurance Corp. (FDIC) would announce a change to deposit insurance alongside its announcements about the First Republic receivership process. The level of uninsured deposits at Silicon Valley Bank and Signature played a crucial role in the bank runs, leading to their downfall.

Deposit Recovery and Growth

“A lot of banks were recovering deposits or growing deposits at this point,” Tenner said in a telephone interview. “This is not fundamentally driven. It’s more pressure on names now that there was no clear change in the deposit insurance.”

At Tuesday’s Milken Institute Global Conference, Wells Fargo & Co. Chief Executive Officer Charlie Scharf emphasized that regulators functioned as they were supposed to in the recent turmoil. He stated that most banks his firm is monitoring are “strong.”