(Bloomberg) – PacWest Bancorp led a rebound in U.S. regional banking stocks after a bruising week of losses, amid growing concerns about the health of the industry following the recent collapse of several lenders.
Bloomberg’s Most Read
Shares of PacWest gained up to 26% in premarket trading in the United States on Friday, while their counterparts Western Alliance Bancorp and First Horizon Corp. rose 15% and 7%, joining a broader rally in US stock futures ahead of jobs data due later in the day. .
Investor panic around regional banks began in March with fears over a few lenders that had large unrealized losses on bond investments or large proportions of uninsured depositors. Despite steps taken by regulators to address these issues, investors raised new concerns, including banks’ high exposure to home loans and general unease about deposits leaving for 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 reignited market jitters, sending peers plummeting. The rout has spread to the biggest lenders, with the KBW banking index registering an 11% drop this week.
PacWest shares plunged 51% on Thursday in its worst one-day loss on record, after the Beverly Hills-based lender confirmed it was in talks with several potential investors. Western Alliance fell 38%, paring an earlier decline after denying a report that it was exploring strategic options. First Horizon fell after the failure of its $13.4 billion merger plan with the Toronto-Dominion Bank.
While some investors, including hedge fund billionaire Bill Ackman, warned there could be more pain to come, others pointed out that the plunge had gone too far. Federal Reserve Chairman Jerome Powell said the First Republic’s resolve after regulators seized the lender was an “important step toward drawing a line” under the banking turmoil.
“The tension between poor market sentiment and strong regional bank liquidity is difficult to reconcile as investors take a drastic view of banks’ capital and operating models,” said Bloomberg Intelligence analyst Herman Chan.
In what could be a relief for small lenders, Bloomberg News reported Thursday that the Federal Deposit Insurance Corp. is about to exempt them from paying additional money to replenish the deposit insurance fund. Those with less than $10 billion in assets would not have to pay, according to the report.
The FDIC plans to release a long-awaited proposal to replenish the fund, which has been partially depleted by the failures of Silicon Valley Bank and Signature Bank, as early as next week, people familiar with the matter said.
Equity trades that bet against regional lenders have returned about $7 billion in paper profits so far this year, according to research by S3 Partners. But possible political remediation could put an end to those cluttered shorts, some experts said.
Read more: Short sellers targeting US banks risk painful squeeze
“While it’s hard to see a catalyst for regional banks to turn around right now, it’s a very popular and very crowded short that could be due for compression at some point,” said Chris Murphy, co- Head of Derivatives Strategy at Susquehanna. International group.
In a bid to calm jittery investors, PacWest said this week that core deposits have risen since March and that it “hasn’t experienced any unusual deposit flows following the sale of First Republic Bank and other news”. Insured deposits rose to 75%, the firm said.
Western Alliance said it did not see any unusual deposit flows after the collapse of the First Republic. Insured deposits represent more than 74% of its total, the company said.
–With help from Joanna Ossinger, Ishika Mookerjee and Michael J. Moore.
(Updates with the FDIC’s proposal in the seventh paragraph.)
Bloomberg Businessweek’s Most Read
©2023 Bloomberg LP