Regional bank shares sink in sign crisis not yet over

Uncertainty continues to pummel the banking industry, despite assurances from financial regulators and bankers such as Jamie Dimon that the worst of the recent crisis is over and the banking system remains strong. Shares of smaller regional lender PacWest Bank plunged nearly 50% Thursday after the company confirmed reports that it was considering “strategic options,” that may include the possible sale of the company.

PacWest, based in Los Angeles, said in a statement that it wasn’t experiencing any out-of-the-ordinary deposit withdrawals and still plans on selling off some assets to free up cash on its balance sheet.

With $44 billion in assets, PacWest is roughly one-fifth the size of the three regional banks that failed over the past two months — Silicon Valley Bank, Signature Bank and First Republic Bank. The bank experienced significant deposit outflows after Silicon Valley Bank failed in mid-March, but says deposits have increased since March 31, including in its venture banking division, which serves technology and start-up companies.

Still, investors fear that PacWest’s fate could mirror that of another California bank — First Republic — which spent weeks looking for a buyer before failing Monday. The regional banks that have run into trouble have seen heavy outflows of deposits and need to raise capital. Nearly all have large amounts of low-interest bonds and commercial real estate assets on their books, and would record losses if they sold them on the open market.

Healthier banks have been reluctant to step in to buy struggling lenders. All assets of Silicon Valley, Signature and First Republic were bought after regulators seized these institutions and their remnants were transferred to the Federal Deposit Insurance Corporation.

In another sign of potential trouble for the banking industry, a major deal was called off Thursday. TD Bank Group and First Horizon Corp. said they called off a planned merger, citing regulatory hurdles. Toronto-Dominion Bank had said in February that it was buying regional bank First Horizon in a $13.4 billion all-cash deal.

Western Alliance shares plunged 30%, even as the bank put out a statement saying it hasn’t experienced any unusual withdrawals and its plans to readjust its balance sheet were underway. Shares of the Phoenix-based lender are down 61% this year.

Other regional banks come under selling pressure Thursday moring. Zions Bancorp dropped 10%, Comerica fell 12%, and KeyCorp fell more than 6%.

The Federal Reserve’s fight against inflation has played a key role in the banking turmoil. The Fed on Wednesday raised its key interest rate by a quarter-point to the highest level in 16 years as part of that campaign, its tenth consecutive rate hike.

The higher rates have prompted depositors to move money into higher-paying certificates of deposit and money market funds. They also played a role in the slowdown in the tech industry, which had major implications for West Coast banks such as Silicon Valley.

Chair Jerome Powell said the Fed would monitor several factors, including the turmoil in the banking sector, in deciding its next move on rates.

The Fed chair stressed his belief that the collapse of three large banks in the past six weeks will likely cause other banks to tighten lending, and that would help the Fed in its inflation fight. Powell also said the seizure of First Republic was an important step toward “drawing a line under” the recent bank stress.”

But some analysts on Wall Street see continued turbulence for the industry.

“Banks have weathered a tumultuous environment for the past two months and uncertainty lingers in the smaller regional bank segment,” JPMorgan told clients.

The firm anticipates bank stocks continuing to be pressured due to regulatory and economic uncertainty, among other factors.

“Regulatory concerns primarily would translate into how much banks need to add to capital, liquidity, and debt, all of which would strengthen them longer term but hurt (earning per share),” it said.

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