Misinformation and investor fears contributed to steep share price declines at some regional banks following the failures of Silicon Valley Bank and Signature Bank, equity analysts said.
The stocks of PacWest Bancorp, Western Alliance Bancorp. and other regional banks first came under pressure in March following the failures, and stocks took sizable hits again following the announcement of First Republic's failure and subsequent acquisition by JPMorgan Chase & Co.
Regional bank stocks recovered some ground in May 5 trading, which continued May 8, with PacWest up 7.64% to $6.20 and Western Alliance up 3.87% to $28.21 as of 2:28 p.m. ET. PacWest also announced May 5 that it cut its common stock dividend to 1 cent per share from 25 cents.
Share price declines at PacWest and Western Alliance made sense immediately after the March bank failures because both companies received media attention for being similar in size to Silicon Valley Bank and Signature Bank, Hovde analyst Ben Gerlinger said in an interview. However, since those failures, Western Alliance reported a "pretty healthy" first quarter, and the company's recent stock turmoil does not appear to be well founded, the analyst added.
Janney analyst Chris Marinac said on S&P Global's Street Talk podcast that fear and "a lot of misinformation" fueled the PacWest and Western Alliance sell-offs.
In a May 4 research note, Matthew Clark of Piper Sandler called the latest PacWest sell-off unwarranted, unrelated to fundamentals and a partial result of short sellers pressing and social media influences trying "to create a self-fulfilling prophecy."
Meanwhile, D.A. Davidson analyst Gary Tenner said in a May 4 note that PacWest is "not trading on fundamentals, given market fears."
Liabilities
Both PacWest and Western Alliance reported deposit outflows in the first quarter, and the banks took steps to enhance their capital and liquidity positions.
PacWest reported declines in noninterest-bearing demand, interest checking, money market and wholesale non-maturity deposits during the first quarter, according to S&P Global Market Intelligence data. Meanwhile, the company took out $4.91 billion from the Federal Reserve's Bank Term Funding Program (BTFP) and reported increases in savings, retail time and brokered time deposits as well as Federal Home Loan Bank (FHLB) borrowings during the same period.
Western Alliance also reported declines in noninterest-bearing demand and money market and savings deposits during the first quarter. The company did not give a detailed breakdown of borrowings as of March 31 in its first-quarter earnings release, but it noted that it had increased FHLB borrowings to $9.5 billion and BTFP borrowings to $1.3 billion as of April 14.
Western Alliance reported increases in interest-bearing demand and certificates of deposits, and deposits stabilized and began to rebound before the end of March.
PacWest reported a decline in its net interest margin to 2.86% in the first quarter from 3.44% in the fourth quarter of 2022. Western Alliance's net interest margin declined to 3.74% in the first quarter from 4.01% in the fourth quarter of 2022.
'Irrational' trading
Articles insinuating that half the banks in the US were insolvent following the failure of First Republic Bank were based on inappropriate analysis assuming a scenario in which all uninsured deposits leave the banking system, Hovde analyst Brett Rabatin said in an interview.
"We're talking about $7 trillion of deposits leaving the bank system," Rabatin said. "I don't think that's going to happen."
While the economic outlook may be uncertain and banks' margins may be under pressure, banks are generally not having trouble managing their liquidity, Rabatin said.
In a May 4 note, Gerlinger gave Western Alliance an "outperform" rating, calling the company a "best of breed" banking franchise. The "irrational bank stock trading" that day did not result in a negative feedback loop for Western Alliance deposits, the analyst wrote in another note May 5.
Much of the fear comes from investors analogizing the current environment with the 2008 financial crisis, but the panic is leading investors to ignore fundamentals and facts about regional banks, Janney's Marinac said. If Western Alliance and others remain proactive in their efforts to change the narrative, short sellers will eventually have to change gears, he added.
"The bears are winning in the short term, but that doesn't mean that they're going to win the war," Marinac said. "They certainly didn't win in 2008, [2009]. I don't think they're going to win now."