What happened
Regional banks resumed their sell-off this morning as turbulent trading in the sector continued after the collapse of three banks last week.
Shares of First Republic (FRCB) traded nearly 21% lower at 10:27 a.m. ET. Meanwhile, shares of Western Alliance (WAL -1.25%) and PacWest Bancorp (PACW) traded more than 12% lower.
So what
First Republic, Western Alliance, and PacWest have been under the microscope since the Federal Deposit Insurance Corporation (FDIC) placed SVB Financial (SIVB.Q), the parent company of Silicon Valley Bank, into receivership last Friday. That's because, like SVB, all these banks have exposure to the tech and venture capital sectors, as well as a lot of uninsured deposits that could be flighty.
Image source: Getty Images.
First Republic, in particular, has struggled and seen significant deposit outflows. Earlier this week, the bank announced that it had tapped additional liquidity from the Federal Reserve and JPMorgan Chase and had $70 billion of unused liquidity. However, that didn't seem to quell the problems, because yesterday the bank had been reportedly looking for a buyer or to further shore up liquidity.
Yesterday afternoon, 11 of the largest U.S. banks agreed to park a combined $30 billion of deposits at First Republic, which appeared to instill confidence because First Republic's stock quickly rebounded yesterday.
First Republic also said that as of March 15, the bank had $34 billion in cash, which didn't include the $30 billion injection. Between March 10 and 15, First Republic's borrowing from the Fed ranged from $20 billion to $109 billion, showing just how volatile things have gotten at the bank. Since March 9, the bank has also added $10 billion of higher-cost borrowings to its balance sheet.
Last night, First Republic suspended its $0.27 quarterly dividend while it focuses on reducing wholesale borrowings and figuring out the ultimate size of its balance sheet. This led to a big after-hours sell-off of the stock.
Elsewhere, media outlets reported late yesterday that PacWest was reportedly looking to shore up liquidity. Western Alliance is looking at a potential credit downgrade, but it also recently announced it now has $25 billion of cash reserves and that FDIC-insured deposits now make up more than 50% of the bank's total deposits. First Republic has already seen a credit downgrade, and PacWest may see a downgrade as well, although it hasn't happened as of this writing.
Now what
I'd expect volatility among these three bank stocks to continue until investors can get better visibility and deposits stabilize. I also wouldn't rule out seeing a deal for First Republic, because even if deposit outflows do stabilize, I think the bank is facing an uphill battle from an earnings perspective.
I'm a bit more optimistic about PacWest and Western Alliance, although we'll see how things shape up with PacWest's attempts to boost liquidity.
Right now, Western Alliance strikes me as the most interesting name in this group, given the higher cash balances and increase in insured deposits. In addition, before all the chaos, Western Alliance was projecting deposit growth and margin expansion. That said, keep in mind that the situation is changing very quickly, so it's probably best to start with a small position and build gradually.
