This week’s bailout of First Republic failed to stem a sell-off in regional bank stocks, which plummeted Tuesday morning as investors digested JPMorgan’s takeover of the troubled California lender.
Trading in PacWest, considered one of the weakest of mid-sized regional banks, was briefly halted due to volatility and was down 25 percent as of midday in New York. The decline put PacWest on course for its worst daily decline since March 10, when the collapse of the Silicon Valley bank put pressure on the entire sector. Western Alliance lost more than 20 percent.
Both banks came under scrutiny for their similarities to SVB and First Republic, which were acquired by the Federal Deposit Insurance Corporation after suffering huge deposit outflows and large paper losses on long-term assets.
JPMorgan on Monday bought First Republic’s deposits and most of its assets, but shareholders were completely wiped out.
“They go from the weakest bank to the weakest bank. And it’s not just the short sellers, it’s the customers who are asking if their deposits are safe,” said Chris Whalen, Chairman of Whalen Global Advisors. “The market is focusing on the weakest links and looking for banks that are vulnerable.”
A KBW index of regional bank stocks slipped more than 5 percent in morning trade. Utah-based Zions Bancorp was the biggest loser in the S&P 500 index, falling 13 percent.
A banking analyst pointed to a caveat in comments by JPMorgan Chase CEO Jamie Dimon after the First Republic takeover. Although he said Monday’s rescue of the California bank “solved them all,” he prefaced his remarks with a warning that “there may be another smaller one.”
“People are heeding that comment,” the analyst said.
Michael Metcalfe, head of macro strategy at State Street Global Markets, said that “the market’s nervousness following the failure of First Republic is understandable.”
However, he noted that long-term investors had been buying more shares of banks in recent weeks, suggesting there is “neither panic nor broader contagion.” He added: “The implication is that [Tuesday’s] Price movements are more speculatively driven.”
Larger bank stocks also fell, although not as much, with Goldman Sachs and Morgan Stanley each falling around 2 percent. JPMorgan lost about 1.4 percent.
Bank stocks tend to be highly cyclical, and the Bureau of Labor Statistics reported Tuesday that job vacancies fell to their lowest level since May 2021 amid mounting fears that the US will exceed its borrowing limit.
Several top investors and executives have warned of possible further consequences from the spate of bank failures.
PGIM executive director David Hunt told attendees at the Milken Institute conference in Beverly Hills on Monday that “we’re just getting started [to see] the impact on the US economy,” while Rishi Kapoor, co-head of Investcorp, said there was “no doubt that the second- and third-order impact on the banking sector . . . will lead to restrictive financial conditions”.
Regional banks are particularly heavily exposed to commercial real estate, which has become an area of concern in recent times due to exposure to higher interest rates and fears that increased homeworking will reduce demand for offices.
In an interview with the Financial Times over the weekend, Berkshire Hathaway’s Charlie Munger warned that regional banks are “full” of bad commercial real estate loans.
Investors have been betting heavily on further falls in some mid-cap banks, with near-term interest in California-based PacWest in particular. However, according to Markit data, the level of shorting has changed little over the past month.
Mid-sized banks with assets between $100 billion and $250 billion are also a concern as US regulators have announced tightening oversight and regulatory requirements, which will likely eat into additional costs and profits for smaller banks.
Debt ceiling concerns could also be contributing to the decline in bank stocks, said Casey Haire, an equities analyst at Jefferies. “It confuses them [Treasury] Yield curve,” he added. “An inverted yield curve is never good for banks.”