First Republic bailout failed to stop U.S. regional bank stocks from falling

A First Republic bailout this week failed to stop a selloff in regional bank stocks that plunged Tuesday morning as investors digested the acquisition of troubled California lender JP Morgan.

Trading at PacWest, considered the weakest among mid-sized regional banks, was temporarily halted due to volatility, dropping 25% by noon in New York. The drop put PacWest on track for its worst daily drop since March 10th. Silicon Valley Bankcollapse put pressure on the entire sector. Western Alliance fell more than 20%.

Both banks have come 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.

JP Morgan bought First Republic’s deposits and most of its assets on Monday, but its shareholders were completely wiped out.

“They’re moving from the weakest bank to the weakest bank. It’s customers who are asking if their deposits are safe, not just short-selling,” said Chris Whalen, chairman of Whalen Global Advisors. . “The market is looking at the weakest link and looking for vulnerable banks.”

The KBW index of local bank stocks fell more than 5% in morning trading. Utah-based Zions Bancorp had the biggest drop in the S&P 500 Index, down 13%.

A banking analyst pointed to the caveat in comments made by JPMorgan Chase Chief Executive Jamie Dimon after the acquisition of First Republic. He said Monday’s rescue of the Bank of California had “almost solved them all,” but warned that “there could be another minor problem.”

“People are crazy about that comment,” said the analyst.

“I can understand the nervousness in the market” after the First Republic failure, said Michael Metcalf, head of macro strategy at State Street Global Markets.

But he notes that long-term investors have been buying more of the bank’s stock in recent weeks, suggesting “neither panic nor a wider contagion.” added to. [Tuesday’s] Price action is driven more speculatively. ”

Bigger bank stocks were down as well, but less steeply. goldman sachs and Morgan Stanley each fell about 2%. JP Morgan fell about 1.4%.

Bank stocks tend to be highly cyclical, with the Bureau of Labor Statistics reporting Tuesday that job openings have fallen to their lowest level since May 2021, but fears that the US will exceed its borrowing limit have increased. ing.

Some Top Investors and Executives warned Regarding the potential further impact of a string of bank failures.

PGIM Chief Executive Officer David Hunt told attendees at the Milken Institute conference in Beverly Hills on Monday. [to see] Investcorp Co-CEO Rishi Kapoor said there is “no doubt about the secondary and tertiary impacts on the banking sector.” . . will cause constraints on the financial situation. ”

Regional banks are particularly exposed to commercial real estate, which has recently emerged as an area of ​​concern due to concerns over rising interest rates and a decline in office demand due to the prevalence of working from home.

In an interview with the Financial Times over the weekend, Berkshire Hathaway Charlie Munger warned Local banks were “filled” with nonperforming commercial real estate loans.

Investors are betting big on further declines in some midsize banks’ stocks, with near-term interest particularly high in California-based PacWest. However, according to Markit data, the level of short-selling activity has changed little over the past month.

Medium-sized banks with assets between $100 billion and $250 billion are also of concern. US regulators are planning to tighten oversight and regulatory requirements.

Jefferies equity analyst Casey Hare said concerns about the debt ceiling may also be contributing to the decline in bank stocks. “that is [Treasury] yield curve,” he added. “An inverted yield curve is never good for banks.”