What happened
Shares of several regional banks rose today as financial institutions struggling in the wake of the Silicon Valley Bank meltdown continued to try and work through their issues. Regulators also made more supportive comments this morning.
First Republic's (FRCB) stock soared close to 37% as of 10:40 a.m. ET. Meanwhile, shares of PacWest Bancorp (PACW) traded nearly 16% higher and Western Alliance (WAL -0.75%) was up 13.5%.
So what
It's been an incredibly bumpy ride for First Republic, which is fighting to survive after three banks collapsed in a matter of days earlier this month. The bank is seen to be riskier due to its large amount of uninsured deposits and billions of unrealized losses sitting in its bond portfolio.
Image source: Getty Images.
The credit rating agency S&P Global has now downgraded First Republic twice in less than a week and has it on "CreditWatch negative," suggesting another downgrade could occur if things don't start to improve. Eleven of the largest banks injected roughly $30 billion of deposits into First Republic, but experts are unsure of whether that is enough. It is clear the bank has faced significant deposit outflows after revealing that it has brought significant higher-cost borrowings onto the balance sheet over the last week.
Still, the stock has rallied today after reports came out that First Republic is working closely with JPMorgan Chase on strategic alternatives, which could include a sale, raising capital, or potentially even converting the $30 billion of deposits into equity.
In other news, U.S. Secretary Treasury Janet Yellen made public comments that suggest regulators would be prepared to backstop deposits -- like they did at Silicon Valley Bank and Signature Bank -- if necessary.
"The steps we took were not focused on aiding specific banks or classes of banks. Our intervention was necessary to protect the broader U.S. banking system," said Yellen. "And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion."
PacWest is another stock that has seemingly run into liquidity issues because a large portion of its deposits came from venture capital firms, which are proving to not be very sticky. Western Alliance also has some exposure to this sector but less so than First Republic or PacWest.
Now what
Ultimately, I think investors and depositors are gaining more confidence that regulators are not likely to let depositors lose their money in the event of a bank run.
Keep in mind that most of these situations are able to be settled without depositors losing money or the federal government needing to backstop deposits because banks can typically sell most of their assets to make depositors whole.
I also think Yellen's comments and UBS' acquisition of Credit Suisse have likely calmed the markets somewhat as well. However, keep in mind that the Federal Reserve will conclude its meeting tomorrow, which could include another rate hike and comments from Fed Chair Jerome Powell that could send stocks lower.
Currently, I have no interest in First Republic's stock. The bank may survive, but as I've mentioned in the past, it faces real earnings challenges moving forward and there's no guarantee that it can reclaim the clients it has lost. A capital raise would be very dilutive with the stock trading where it is and an acquisition is not likely to result in a good sale price.
Of these three names, I think Western Alliance presents the best opportunity because it has a more diverse deposit base and a better earnings trajectory. Still, given the developing situation, it makes sense to start with a small position.
