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(Reuters) -PacWest Bancorp shares led declines in U.S. regional lenders on Tuesday, as the demise of three banks in less than two months heightened investor fears that the ongoing crisis could deepen.
PacWest fell 5%, a day after the Los Angeles-based lender’s decision to cut its quarterly dividend failed to stem worries about its financial stability. The stock had rallied 88% in the last two sessions after a bruising sell-off sent it to a record low last week.
The KBW Regional Banking Index dropped 1.8% on Tuesday and was hovering near its 30-month low hit last week after the collapse of First Republic Bank (OTC:FRCB) and PacWest’s decision to explore strategic options.
Meanwhile, Wall Street’s main indexes fell as downbeat earnings forecasts from PayPal Holdings Inc (NASDAQ:PYPL) and Skyworks Solutions (NASDAQ:SWKS) Inc weighed on market sentiment. [.N]
PacWest and peer Western Alliance (NYSE:WAL), which have been at the heart of the sell-off in regional banks, saw the steepest drop in deposits in the first quarter after First Republic, according to S&P Global (NYSE:SPGI) Market Intelligence data.
“Deposit flight is top of mind for investors as the collapse of Silicon Valley, Signature Bank (OTC:SBNY), and First Republic all coincided with mass deposit flight,” said Alexander Yokum, equity analyst at CFRA Research. His outlook on regional banks is neutral as deflated valuations, relatively strong capital levels, and resilient credit quality are countered by fears of deposit outflow, slowing loan growth and big exposure to struggling office real estate.
For the week ended April 26, deposits at small banks totaled $5.32 trillion, down just 0.5% from a week earlier, according to data from the Federal Reserve.
On Monday, Treasury Secretary Janet Yellen said deposits had stabilized and regulators stood ready to use the same tools used in recent bank rescues if more contagion fears arose.
Adding to the banking woes, U.S. firms of all sizes were showing less demand for credit in the first quarter than three months ago, according to a Federal Reserve survey, among the first measures of sentiment across the sector since the recent run of bank failures. The tightening credit conditions for U.S. business and households in the first few months of the year, however, was likely due to the impact of higher interest rates than the cliff-like decline in credit some feared after the March collapse of Silicon Valley Bank, Fed’s quarterly survey showed. “We do expect some credit erosion as the year progresses, but we also believe the banks have visibility into the outlook and can manage any credit stresses that emerge,” said Jon Arfstrom, analyst at RBC Capital Markets in a note. Western Alliance dropped 3.3%, while Customers Bancorp (NYSE:CUBI) and First Horizon (NYSE:FHN) Corp fell 4.7% and 4.4%, respectively, with Arfstrom noting that the pullback in banks shares overall has made their valuations attractive.
Customers Bancorp offered no comment, while PacWest, Western Alliance and First Horizon did not immediately respond to Reuters’ requests for comment.
Wall Street executives and bank analysts last week called on regulators to quickly provide more protection for bank deposits and consider other backstops, arguing only an intervention could stop the crisis.
Since the start of first-quarter earnings, the shares of midcap banks have lost 9% and are down by a median 29% since March 8 when Silicon Valley Bank disclosed its deposit drain, according to Morgan Stanley (NYSE:MS) analyst Manan Gosalia. He said the market reaction was overdone as there was no sign of more deposit outflows, even though cost of funds, loan growth and regulation could weigh on the regional lenders.
