What happened
Shares of PacWest Bancorp (PACW) traded more than 7% higher as of 11:12 a.m. ET today after the bank announced late Friday night that it would nearly eliminate its dividend. Shares had been up almost 40% in premarket trading.
So what
On Friday night, PacWest announced that it would slash its quarterly dividend from $0.25 to $0.01 per common share.
PacWest President and CEO Paul Taylor said in a statement:
Given current economic uncertainty, recent volatility in the banking sector, and potential changes in regulatory capital requirements, we view reducing the dividend as a prudent step to accelerate our plans to build capital to CET1 (common equity tier 1) of 10%-plus. Our business remains fundamentally sound, and we will continue with our strategy to focus on our relationship-based community banking model.
Since the banking crisis began, PacWest has been one of the hardest-hit bank stocks, as investors were concerned about its exposure to the tech and venture capital sector, the amount of uninsured deposits it previously had, and unrealized bond losses still sitting on the bank's balance sheet.
Now what
Looking at PacWest's capital ratios, they are a little bit low, especially the tangible common equity ratio. Considering potential regulatory changes and the remaining unrealized losses, the bank does need to boost capital.
If PacWest can do so with things like a dividend cut and the sale of certain assets, that's probably a better route than raising capital while the stock trades at very depressed levels, although a capital raise still could happen.
Ultimately, if PacWest can increase capital levels at the bank and deposits remain stable, it should be able to survive and eventually rebound from these levels. But it's definitely going to be one of, if not the most, volatile names in the banking sector, so investors need to have a high risk tolerance if they are going to invest, understanding that the outcome is far from certain.
