(Bloomberg) — Shares of regional US banks headed into another day of choppy trading after the failure of troubled lender First Republic Bank earlier this week prompted investors to renew their scrutiny of the sector’s outlook.
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PacWest Bancorp and Western Alliance Bancorp both swung between gains and losses in US pre-market trading Wednesday morning, erasing earlier declines that sent them down as much as 14% and 7.8%, respectively. Both stocks fell on Tuesday, triggering a sell-off in regional bank stocks that rattled broader markets amid an increased focus on stabilizing the industry.
“While the bank space likely faces legitimate concerns regarding future profitability, we believe that the Western Alliance’s estimated current and future yield metrics justify a dramatic double-digit expansion from current levels,” Hovde Group analyst Ben Gerlinger wrote in a note on Wednesday. He described trading in bank shares on Tuesday as illogical. “Near historic low valuation provides a significant risk/reward entry point.”
The broader stock markets saw gains ahead of the expected Fed rate hike later in the day. Kaplan called on policymakers to halt their campaign to raise interest rates as the banking crisis may be far from over. First Republic, which was acquired by JPMorgan Chase & Co on Monday in a government-led deal, is the fourth US bank to fail this year.
“It’s clear that investors are focusing on the negatives again with many bank stocks trading more on deteriorating sentiment than deteriorating fundamentals,” Christopher McGraty, an analyst at Keefe, Bruyette & Woods, wrote in a note. McGraty added that Wednesday’s interest rate decision and the Fed’s press conference are now even more important given the shaken levels of confidence in banks.
Bearish bets on regional banks have jumped in the past week, which could add pressure on stocks. The short interest rate as a percentage of shares outstanding in the S&P Regional Banking ETF rose to 96% from 74% in the previous week, according to data compiled by S3 Partners.
“Although the banks’ decisions have worked as intended with stronger entities acquiring failing institutions, market negativity can destabilize even respected banks like the First Republic,” writes Bloomberg Intelligence analyst Herman Chan.
The situation may be “more serious than we currently understand,” former Dallas Fed President Robert Kaplan told Bloomberg Television.
The KBW Regional Banking Index lost 8% in the first two days of trading this week to hit its lowest level since 2020. While First Republic’s problems stemmed from bad investments and a run on bank deposits, the likes of PacWest and Western Alliance published results last month that showed stability Their deposit rules, which is an encouraging sign for investors.
Shares of their mid-cap peers are volatile in the premarket on Wednesday, too. Zions Bancorp and Truist Financial Corp. both swung between gains and losses.
“None of the banks within Bank of America’s undercover world have seen anywhere near the pressures of the three failed banks,” Bank of America Corp. analysts including Ibrahim Poonawalla wrote in a note on Wednesday. “However, the persistent sell-off in stocks has the potential to drive deposit customer behavior and exacerbate profitability challenges facing some banks.”
– With assistance from Matt Turner.
(Updates share moves and add additional commentary.)
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