First Republic rescue does not stop the slide of US regional banks shares

PacWest and Western Alliance fall amid widespread sale of lendersThe rescue of First Republic this week has failed to arrest a sell-off in regional bank shares, which plunged on Tuesday as investors digested JPMorgan’s takeover of the troubled Californian lender.

PacWest was temporarily halted due to volatility, and the stock closed down by 27.8 percent. PacWest suffered its worst daily drop since March 10 when Silicon Valley Bank collapsed, putting pressure on the entire industry. Western Alliance dropped by 15.1%.

The similarities between the two banks and SVB and First Republic, who were taken over by Federal Deposit Insurance Corporation following large deposit outflows as well as paper losses on old assets, have attracted scrutiny.

JPMorgan purchased First Republic ‘s deposits , and the majority of its assets Monday. However, shareholders lost everything.

They are moving from one weak bank to another weak bank. It’s not only the short sellers, but also the customers who ask if their deposit is safe,” said Chris Whalen. The market is looking at the weakest links, and for vulnerable banks.

A KBW regional bank index fell by 5.5 percent. The S&P 500 index saw Comerica, based in Utah, and Zions Bancorp drop by 12.4% and 10.8% respectively.

A banking analyst drew attention to the caveat that Jamie Dimon, chief executive of JPMorgan Chase, made after First Republic’s takeover. He said that the rescue of California’s First Republic bank on Monday had “pretty well resolved” all the problems, but he warned there could be “another smaller one”.

The analyst stated that “people are latching onto this comment.”

Michael Metcalfe said that “market jitters are understandable” after the failure of First Republic.

He noted that long-term investors have been buying more bank shares in recent weeks. This suggests “neither panic, nor wider contagion”. He said: “The implied implication is [Tuesday’s] price movement is more speculatively-driven.”Larger bank stocks were falling as well, although not as sharply, with Goldman Sachs Morgan Stanley and JPMorgan both closed down by 1.9 and 2.1% respectively. JPMorgan dropped 1.6 per cent.

The banking stocks are cyclical. On Tuesday, the Bureau of Labor Statistics announced that the number of jobs had dropped to its lowest level since 2021. Meanwhile, there is growing concern about the US exceeding its borrowing limit.

Top investors and executives warned of the possibility that the recent bank failures could have a negative impact on the economy.

PGIM’s David Hunt, who spoke at the Milken Institute Conference in Beverly Hills Monday, said that “we are just beginning to see” the implications of the US economy. Rishi Kapoor, co-chief of Investcorp, also stated that there is “no question that the second and third order effect on the banking industry”. . . “It will cause financial constraints”.

The regional banks are especially exposed to commercial property, which is a growing concern due to its exposure to rising interest rates, and the fear that working from home may reduce demand for office space.

Berkshire Hathaway CEO Charlie Munger warned  that regional banks are “full” of bad commercial real estate loans in an interview conducted over the weekend.

Investors are heavily betting that shares of some midsized banks will continue to decline, and PacWest in California is a particular favorite. Markit data shows that the level of shorting has remained relatively unchanged over the last month.

The mid-sized banks with assets between $100bn to $250bn are also of concern, as US regulators plan to tighten up supervision and regulatory requirements. This will likely increase costs and reduce profits for smaller lenders.

Casey Haire is an equity analyst at Jefferies and believes that concerns over the debt limit could be contributing to the decline in bank stocks. He added, “That mess with the Treasury yield curve.” “An inverted curve is bad for banks.”