What happened
Bank stocks rose this week on seemingly good news out of PacWest Bancorp (PACW) and as the large and super-regional banks breezed through the Federal Reserve's annual stress testing.
Shares of PacWest Bancorp traded roughly 16.5% higher for the week as of 12:46 p.m. ET Thursday, according to data from S&P Global Market Intelligence. Meanwhile, shares of Customers Bancorp (CUBI -5.47%) traded roughly 10.4% higher, while Orange County Bancorp (OBT 1.98%) was up 11.4% for the week.
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So what
Since the banking crisis earlier this year, PacWest has been one of, if not the most pressured and volatile bank stocks in the sector, with shares down close to 63% this year. PacWest had exposure to venture capital and tech deposits, which played a big role during the banking crisis. The bank has seen its total deposits decline since the banking crisis began. To replace those deposits PacWest had to take on higher-cost debt, which will ultimately eat into profitability.
Earlier this week, PacWest announced that it has entered into an agreement to sell a lender finance loan portfolio with outstanding balances of $3.5 billion to Ares Management Corporation. Ares purchased the first tranche of loans including $2.07 billion of outstanding principal balances for roughly $2 billion.
This is part of PacWest's strategy following the banking crisis. Management wants to shrink the balance sheet so it can reduce higher-cost funding in order to improve liquidity and also bolster capital.
In other news, Orange County Bancorp, a $2.5 billion asset bank headquartered in Middletown, New York, joined the Russell 2000 index earlier this week, which is composed of small-cap U.S. stocks. Whenever a stock joins an index like this it usually pops because funds that invest in the index essentially need to purchase the stock.
Another big event, which is lifting the industry this week is the Federal Reserve released its annual stress testing results last night, and all 23 banks put through the test passed fairly easily. Stress testing puts the largest and most complex banks through a hypothetical severe recession to see how their balance sheets will hold up.
While PacWest, Customers, and Orange County do not go through this kind of stress testing, given what has happened in the industry this year, anything that highlights the safety and soundness of the banking system is likely going to benefit the industry.
Now what
While PacWest's loan portfolio sale should help the bank bolster capital and liquidity, I still view PacWest to be in an uncertain position, especially when you think about longer-term profitability, which is why I wouldn't recommend investors take anything more than a small speculative position.
Orange County Bancorp is definitely a solid bank but some of the dynamics from the banking crisis like higher funding costs are certainly going to hamstring it in the near term. Overall, I think the bank should be able to navigate the current environment, although I see better opportunities within the sector.
Nothing particularly unique seemed to happen to Customers Bancorp this week but this is certainly a stock that I believe has been incredibly undervalued, especially after the sell-off this year as a result of the crisis. The company trades at roughly 75% of its tangible book value or net worth, yet is putting up strong returns and I'm actually expecting a good second quarter from the bank.
