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PacWest weighs its strategic options, sending bank shares in a tailspin

2023-05-04T04:18:26Z

A general view of Pacific Western Bank in Huntington Beach, California, U.S., March 22, 2023. REUTERS/Mike Blake/File Photo

PacWest Bancorp (PACW.O) is exploring strategic options including a sale or capital raising, a source familiar with the matter said, sending the shares of the bank and several other U.S. regional lenders tumbling in after-market trading.

Later on Wednesday, Western Alliance Bancorp (WAL.N) sought to assure markets, saying it had not experienced any unusual deposit flows and had adequate liquidity.

The Phoenix-based regional lender said it was “reaffirming its financial strength as well as its deposit growth guidance in response to recent industry events.”

A PacWest spokesperson declined to comment.

The fall in shares, including a 52% plunge at PacWest and 23% decline in Western Alliance, underscores how investors remain unconvinced about the health of regional banks despite regulators’ efforts to call an end to the banking crisis that started with the collapse of Silicon Valley Bank and Signature Bank in March.

The sector jitters come after a period of relative calm, and could tighten credit availability across America and hurt growth.

“Confidence in a financial institution is built over decades and destroyed in days. As each domino falls, the next weakest bank begins to wobble,” billionaire investor Bill Ackman wrote in a tweet.

He called on regulators to put in a broad deposit guarantee.

“Until investors are rewarded for betting on a wobbling bank, there will be no bid, and the best sale is the last price,” he wrote.

PacWest stock has lost almost 90% of its value since the regional banking crisis started on March 8. Other regional lenders, whose shares have been under pressure this week, also fell, giving up gains from earlier in the day.

Zion Bancorp (ZION.O), First Horizon (FHN.N) and Comerica (CMA.N) each slumped more than 7% and the SPDR S&P Regional Banking ETF (KRE.P) dropped 5%.

Zion and First Horizon were not available for comment after business hours on Wednesday.

Comerica said although its deposits had declined in the first quarter, they remained above pre-pandemic levels and were now less concentrated with price-sensitive customers.

“We do not feel that these recent events impacting particular banks, as well as the fear currently driving stock price fluctuations, accurately reflect the overall health of the banking industry,” the Dallas-based lender said in a statement late on Wednesday.

The crisis in U.S. regional banks began in March, when a rapid social media-driven run on Silicon Valley Bank led to its abrupt closure and sent depositors across regional banks fleeing to the safety of the largest institutions.

The problems forced regulators to step in with emergency measures. The markets appeared to calm by late last month.

Last weekend, however, First Republic Bank, which had been swept up in the bank run, failed and was sold to JPMorgan Chase & Co (JPM.N) in a weekend auction conducted by the Federal Deposit Insurance Corp (FDIC).

Although First Republic, a California-based lender to the wealthy, became the third bank failure since March, regulators hoped its sale to JPMorgan would draw a line under the crisis.

Instead, the deal renewed fears in the market. Some investors warned that the crisis was not over, and hedge funds bet other dominos may still fall.

Some executives have said that a bank trying to raise capital during a crisis could be seen as a sign of weakness and spook investors instead of boosting confidence in the institution.

Major banks and private equity firms have balked at offering capital infusions to regional lenders without a government backstop because of concerns about booking losses on their low-yielding assets such as loans and investment portfolios.

The cost of insuring against further losses in regional U.S. bank stocks stood on Wednesday near a one-month high in options markets.

Earlier on Wednesday, U.S. Federal Reserve Chair Jerome Powell reiterated that the country’s banking system was resilient while delivering another 25 basis point rate hike. Powell said bank deposits had stabilized.

Based in Los Angeles, PacWest has branches in California as well as Durham, North Carolina and Denver, Colorado. In its first-quarter earnings last week, its deposits had stabilized after some customers pulled their money.

On Wednesday a source said the lender was looking at options that include a potential sale or capital raise.

The bank, one of the top 100 U.S. banks, is hoping to avoid the fate of others that were taken over by U.S. regulators by proactively finding a solution to bolster its finances, the source said, asking not to be identified because the matter is confidential.

The effort comes after the bank raised $1.4 billion from investment firm Atlas SP Partners in late March.

“When you lose confidence in the banks, that equals a whole lot of trouble,” said Dennis Dick, a trader at Triple D Trading in Ontario, Canada. “I haven’t felt this scared since the financial crisis.”