After a bizarre few days of trading, it appears that the market's anxiety about regional banks might not have eased after all. Shares of PacWest Bancorp (PACW) crashed in after-hours trading Wednesday, down more than 53% as of 7:50 p.m. ET, as Bloomberg reported that the bank is weighing strategic options, including a potential sale.
Bloomberg also reported that PacWest, which is based in Los Angeles and has $44 billion in assets, is considering breaking itself up or raising capital.
With the stock getting crushed, what should investors do? Let's take a look.
A strange turn
PacWest, along with First Republic (OTC: FRCB) and Western Alliance (WAL 2.14%), has been under intense scrutiny since Silicon Valley Bank went under. All of these banks possessed similar characteristics, including exposure to the start-up and venture capital sector and having previously held lots of uninsured deposits.
But when PacWest reported its first-quarter earnings results last week, they were largely received well by the market. PacWest said that from March 20 to April 24, deposits had rebounded from $27.1 billion to just shy of $29 billion.
Image source: Getty Images.
Roughly 73% of total deposits at the bank were insured by the Federal Deposit Insurance Corporation, up from 48% at the end of 2022, and the bank said it had enough immediately available liquidity to cover 153% of uninsured deposits. PacWest also said that unrealized losses in its bond portfolio had declined by $55 million in the first quarter.
When JPMorgan Chase (JPM 1.94%) acquired most of First Republic's assets on Monday, I thought First Republic's seizure would turn out to be a stabilizing event for the sector. It has been anything but. On Tuesday, the SPDR S&P Regional Banking ETF fell by more than 6%, while PacWest and Western Alliance saw their shares sell off by 28% and 15%, respectively.
The market seems to have been worried by a comment made by JPMorgan Chase CEO Jamie Dimon. In the conference call announcing the First Republic deal, an analyst asked Dimon if he viewed the resolution as the end of broader liquidity issues in the banking sector. Dimon said, "There may be another small one, but this pretty much resolves them all." However, he prefaced this by saying that "No crystal ball is perfect."
Other investors also recently expressed doubt about an end to the crisis. Elaine Zaharis-Nikas, a portfolio manager at Cohen & Steers, which had previously been a consistent buyer of regional bank preferred stock, told Bloomberg on Tuesday that the company is still looking for signs of further stability.
What should investors do?
Well, this is clearly a very difficult situation. But as far as I can tell, nothing has changed since PacWest's earnings report last week. Dimon also may very well have not been referring to any specific bank but just speaking in general, because there are more than 4,000 banks in the U.S.
On Wednesday, the Federal Reserve did what most expected, raising interest rates by a quarter-point and indicating that it may be done with rate hikes. Futures pricing data indicates that most traders expect the Fed to keep rates where they are in the near term and believe there is a chance that the Fed will cut rates in September.
The problem is that this intense sell-off makes things more difficult for PacWest. Management obviously wouldn't want to raise capital at these super-depressed levels, and this news might start to scare depositors and manifest into deposit outflows. Social media has created a dangerous new world for banking. I'm also not sure how many banks would be interested in buying PacWest right now, because potential acquirers would have to deal with the unrealized bond losses and the bank is likely going to face earnings headwinds this year.
Ultimately, if you are going to try to buy PacWest stock after this big drop, you need to be prepared to lose everything. I don't fully understand the sell-off, and anything could happen.
