Bank stocks continued their descent on Thursday as shares of PacWest and First Horizon weighed on the market. Both banks are experiencing the fallout from a banking crisis that was sparked by Silicon Valley Bank in March. Now PacWest is exploring a possible sale and First Horizon has lost its M&A partner, TD Bank, as a casualty of the banking industry turmoil.
PacWest shares fell over 50% while First Horizon stock lost one-third of its value in a single day. Trading in PacWest shares was halted more than once on Thursday due to the high volatility. Investors were spooked after the company revealed it might be on the block, which investors interpreted to mean that it is doomed.
The entire regional banking sector comprising over 100 individual names was trading in the red on Thursday, many of which were suffering declines in the double-digit percentage range. The combined market cap of regional banks has fallen from $475 billion at the start of the year to $100 billion as of early May, a decline of more than 75%.
Now that the bottom has fallen out in regional banking stocks, it’s unclear how much further they may have to fall as stocks search for support. Meanwhile, the selling pressure spilled over into the broader stock market, with the Dow Jones Industrial Average, S&P 500 and Nasdaq all finishing the day in the red.
On Wednesday night, PacWest issued a statement reiterating its plan to explore strategic options, including a possible asset sale. This ignited fears among investors, who are already jittery in the wake of SVB and First Republic’s demise.
PacWest has already been approached by potential partners and investors to discuss its options as it seeks to strengthen its capital ratio. If things escalate, PacWest could be the latest regional bank to fail this year.
However, unlike Silicon Valley Bank and First Republic, which set off the wave of bank failures, PacWest said it’s not experiencing massive deposit withdrawals from its customers. The bank says core customer deposits are on the rise since March.
Nevertheless, SVB, First Republic and PacWest all have a history of doing business with tech startups and high-net-worth individuals, who were behind bank runs on SVB and First Republic.
Regulators have been stepping in to rescue troubled banks despite the FDIC cap of $250,000 on accounts. This could prevent or delay another bank from stepping up to buy PacWest’s assets as the industry waits to see what regulators will do.
The fear of a contagion effect spilled over to other regional bank stocks.
First Horizon/TD Bank Blockbuster Deal Is Off
First Horizon was in the middle of a deal to be acquired by Canada’s TD Bank, but that $13.4 billion deal is now off the table. TD Bank issued a statement saying that both banks mutually agreed to terminate the agreement, blaming regulatory uncertainty.
First Horizon and TD Bank had agreed to combine in early 2022, just before the Fed embarked on its aggressive interest rate path. Since then, bank balance sheets have come under severe pressure, a situation that’s been worsened by customer withdrawals and SVB’s demise. First Horizon maintains it has not observed any material changes to its customer withdrawals, according to reports.
With bank valuations under pressure, analysts wondered why TD Bank and First Horizon couldn’t complete a deal at a lower price to avoid walking away from it. After all, the canceled merger exacerbates an already precarious situation among the regional banks and could fuel more fallout in the space.
It hasn’t even been a week since regulators seized the beleaguered First Republic Bank and JPMorgan stepped up to buy most of its assets. The banking industry hadn’t experienced a failure of this magnitude since the Great Financial Crisis.
At that time, JPMorgan boss Jamie Dimon suggested that the worst of the banking industry crisis was in the rearview mirror, but it seems he might have spoken out of turn. He wasn’t the only one.
Fed Chairman Jerome Powell in remarks touted the strength of the U.S. banking industry. He made the comments after the Fed decided to raise interest rates by a quarter point. Based on the tone of the Fed’s remarks, many suspect they are planning to suspend their hawkish policy for a while despite persistently high inflation. This can’t come soon enough for bank stocks.
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