Share prices of several regional banks tumbled on Thursday, a sign that investors are not convinced that the troubles of the past two months are over.
Shares of PacWest Bancorp closed down 50% and the Beverly Hills, California-based bank said it was exploring strategic options. Western Alliance Bancorp in Phoenix lost 38% while Comerica in Dallas lost 12%. The KBW Nasdaq banking index fell 4%.
The sharp price declines highlighted unstable investor sentiment about the health of the banking sector. Industry leaders had predicted that the JPMorgan Chase announcement regulator-assisted purchase of First Republic Bank at the start of the week would bolster investor confidence in the sector, leading bank stocks to regain some of the ground they had lost since March. That change has yet to materialize.
Large declines in a bank’s share price can pose risks for a bank in addition to those faced by shareholders. When prices drop sharply, depositors may panic and start withdrawing uninsured deposits. In turn, deposit declines reported by banks may lead to further problems for a bank’s share price.
“If this scares depositors enough to leave, the bank in question could have trouble creating more liquidity,” said Tim Coffey, associate director of deposit research at Janney Montgomery Scott.
Analysts at Autonomous Research wrote in a research note Thursday that there are “obvious fears of a negative feedback loop between equity prices and deposits.”
The banks affected in this round of the banking crisis they differ from Silicon Valley Bank, whose collapse started the crisis, because they have not incurred significant losses on long-term securities.
Furthermore, many of the banks that saw their share prices fall this week have reported stable deposit balances in recent weeks, another key difference between them and the banks that suffered large deposit outflows in March.
Deposits at Western Alliance have so far been flat in the second quarter, even since the announcement of JPMorgan’s acquisition of First Republic, the bank said Wednesday. Total deposits had risen to $48.8 billion on Wednesday, up from $48.2 billion on Monday. capital levels and insured deposits also increased, the bank said.
Western Alliance shares fell sharply on Thursday after a Financial Times report said the bank was exploring a sale. In a statement, the Western Alliance called the report “categorically false” and said: “We are exploring all of our legal options in response to today’s article.”
Share prices in banks like Western Alliance are falling because of a bearish trading strategy in which shares are shorting, not because of weak fundamentals at the bank, Coffey said.
A regional bank that lost substantial deposits during the first quarter is westpac, the parent company of Pacific Western Bank. Like many larger banks, PacWest paid very little on customer deposits in recent quarters, wiping out the bank’s deposits as customers sought higher yields, Bill Moreland, a partner at BankRegData, wrote in a note. .
“The four largest banks could get away with it, but the next tier doesn’t seem to have that benefit,” Moreland said.
In a statement posted on its website this week, PacWest said it had not seen “out of the ordinary” deposit flows in recent days. Core deposits at the bank have increased since the end of the first quarter, totaling $28 billion as of May 2.
PacWest said its cash and available liquidity are at 188% of the level of its uninsured deposits. The bank also said that its previously announced plan to sell your Lender Finance loan portfolio is still going, and that the completion of that sale will boost a key equity ratio.
And after Bloomberg News reported Wednesday that the bank has been weighing a range of strategic optionsincluding a sale, PacWest said it has been approached by several potential partners and investors, and discussions are ongoing.
“The company will continue to evaluate all options to maximize shareholder value,” PacWest said.