A Pacific Western Bank branch in Encino, California, USA, on Saturday, April 22, 2023. PacWest Bancorp is scheduled to release earnings figures on April 25.

Morgan Lieberman/Bloomberg

(Bloomberg Opinion) –PacWest Bancorp led a rally in regional U.S. bank shares after a tough week of losses, amid signs some of the selling has been overdone.

PacWest shares soared as much as 96% in US trading on Friday, their biggest intraday gain yet, amid multiple trading pauses for volatility, while Western Alliance Bancorp rose as much as 59%. Charles Schwab, whose massive banking unit has been a source of concern for investors, added 6.1% after an update showed outflows slowing for a third month. Other lenders that had been caught in the downdraft also made up some lost ground, with Zions Bancorp nearly 23% and Comerica as much as 18%.

The turmoil has engulfed regional banks since early March amid concerns that large unrealized losses on bond investments could push some of them to the brink, with four collapsing. Investors have also focused on banks’ high exposure to real estate loans and callable deposits, as clients sought higher-yielding alternatives.

The government seizure and sale of First Republic Bank earlier this week and a report that PacWest was exploring strategic options reignited market jitters on Thursday, sending its peers lower. The rout spread to the biggest lenders, with the KBW bank index falling 11% this week through Thursday. The benchmark index added as much as 4.8% on Friday, and the KBW Regional Lenders Index rose 5.1%.

While some investors, including hedge fund billionaire Bill Ackman, warned there could be more pain to come, others said the slide has gone too far. “The tension between weak market sentiment and strong liquidity at regional banks is hard to reconcile, as investors take a draconian view of banks’ capital and operating models,” said Herman Chan, an analyst at Bloomberg Intelligence.

The weekend rally may be causing some pain for short sellers looking to profit from the continued downturn at regional banks. Wells Fargo banking analysts led by Mike Mayo pointed to a variety of triggers for a short-covering rally, including possible government action such as higher deposit guarantees and temporary limits on shorting.

‘Government concern’

“Short selling can aid liquidity, price discovery, and checks and balances in the capital markets, especially given the bullish bias,” Mayo wrote in a note to clients. “However, in the current situation with the regional banks, it seems that the concern of the government is that the scope of the comments in the market is driving the result more than it would be normal.”

In a Friday morning note upgrading Western Alliance, Comerica and Zions to overweights, JPMorgan analyst Steven Alexopoulos said the selloff had fed on itself. “With such negative sentiment, in our view, it won’t take much to see a significant medium-term downgrade of regional bank stocks,” he wrote.

Meanwhile, Wedbush removed Western Alliance from its list of best stock research ideas after less than three weeks, albeit with some ambivalence. Delisting the shares in a note on Friday, the securities firm noted “investment pricing discipline” for the change, while rating the shares superior. “I didn’t want WAL delisted, but our internal rules mandated delisting,” analyst David Chiaverini said by email.

PacWest shares fell 51% on Thursday in their worst one-day loss on record, after the Beverly Hills-based lender confirmed it is in talks with several potential investors. Western Alliance plunged 38%, paring an earlier decline after denying a report that it is exploring strategic options.

The pessimism became so indiscriminate that Pacific West Bancorp, a small lender based outside Portland, Oregon, felt compelled to issue a statement reminding everyone that it is “a separate entity with no affiliation” to the similarly named PacWest. .

While it is risky to accept such dips — “catching a falling knife” in Wall Street lingo — analysts at Hovde Group said a market bottom could be close.

“The knife being caught right now could at least be dull,” the firm wrote in a note to investors. “Given our view that there is nothing fundamentally new happening to deposits in the banking system (other than the already known movement from lower-cost sources), we think investors could be handsomely rewarded.”

In what could be a relief for smaller lenders, Bloomberg News reported Thursday that the Federal Deposit Insurance Corporation is prepared to exempt them from putting up extra money to replenish the deposit insurance fund. Those with less than $10 billion in assets would not have to pay, according to the report.

FDIC Replenishment

The FDIC plans to release as early as next week a long-awaited proposal to top up the fund, which has been dried up in part by the failures of Silicon Valley Bank and Signature Bank, people familiar with the matter said.

Equity trades that bet against regional lenders have generated about $7 billion in paper gains so far this year, according to research by S3 Partners. But possible policy remediation may put an end to those crowded shorts, some experts said.

“While it’s hard to see a catalyst to turn around regional banks right now, it’s a very popular and well-traveled short position that could see a squeeze at some point,” said Chris Murphy, co-head of derivatives strategy at Susquehanna. . International Group.

In an attempt to calm uneasy investors, PacWest said this week that core deposits have risen since March and that it has “not experienced unusual deposit flows following the sale of First Republic Bank and other news.” Insured deposits increased to 75%, the firm said.

Western Alliance said it has not seen unusual deposit flows after the First Republic collapse. Insured deposits represent more than 74% of the total, the company said.

–With assistance from Joanna Ossinger, Ishika Mookerjee, and Michael J. Moore.

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