(Bloomberg) – U.S. regional banking stocks are heading for another day of volatile trading after the bankruptcy of troubled lender First Republic Bank earlier this week prompted investors to renew their scrutiny of the sector’s outlook.
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PacWest Bancorp and Western Alliance Bancorp each swung between gains and losses in U.S. premarket trading on Wednesday morning, erasing previous declines that had taken them as low as 14% and 7.8%, respectively. Both stocks fell on Tuesday, leading to a sell-off in regional bank stocks that rattled broader markets amid heightened focus on industry stability.
“While the banking space likely faces legitimate concerns about future profitability, we believe Western Alliance’s current and estimated performance metrics warrant dramatic multiple expansion from current levels,” the analyst wrote. Hovde group, Ben Gerlinger, in a Wednesday note. He called Tuesday’s bank stock trading irrational. “The near historically low valuation offers a substantial risk/reward entry point.”
Equity markets more broadly posted gains ahead of the Fed’s expected interest rate hike later in the day. Kaplan called on policymakers to pause their rate hike campaign as the banking crisis may be far from over. First Republic, acquired by JPMorgan Chase & Co. on Monday in a government-led deal, is the fourth U.S. lender to collapse this year.
“Investors are once again clearly focused on the downside, with many bank stocks trading on deteriorating sentiment rather than deteriorating fundamentals,” Keefe, Bruyette & Woods analyst Christopher McGratty wrote in a note. McGratty added that the Federal Reserve’s interest rate decision and press conference on Wednesday is now even more important given that confidence levels in the banking sector have been shaken.
Bearish bets on regional banks surged last week, which could add pressure on stocks. Short interest as a percentage of outstanding shares of the SPDR S&P Regional Banking ETF rose to 96% from 74% the previous week, according to data compiled by S3 Partners.
“While bank resolutions have worked as expected with stronger entities acquiring failing institutions, market negativity can destabilize even reputable banks like First Republic,” wrote Bloomberg Intelligence analyst Herman Chan.
The situation may well be “more serious than we currently think,” former Federal Reserve Bank of Dallas President Robert Kaplan told Bloomberg Television.
The KBW regional banks index shed 8% in the first two days of trading this week to its lowest level since 2020. As First Republic’s troubles stemmed from poor investments and a run on deposits from Banking, companies like PacWest and Western Alliance released results last month that showed their deposit bases had stabilized, an encouraging sign for investors.
Shares of other mid-sized peers also fluctuate ahead of Wednesday’s trade. Zions Bancorp and Truist Financial Corp. each wavered between gains and losses.
“None of the banks in BofA’s banking coverage universe experienced the stress of the three failed banks,” Bank of America Corp. analysts, including Ebrahim Poonawala, wrote on Wednesday. “However, a persistent sell-off in stocks has the potential to inform deposit customer behavior and exacerbate the profitability issues facing some banks.”
–With help from Matt Turner.
(Updates share moves and adds additional comments.)
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