PacWest (PACW) and Western Alliance (WAL) plunged Tuesday as investors remained convinced the worst was not yet over for troubled regional banks.
The stock drops for both institutions came one day after JPMorgan Chase (JPM) purchased the bulk of First Republic (FRC), in a deal that was designed to restore stability to the banking system after two months of turmoil.
PacWest ended Tuesday down 28%, while Western Alliance dropped 15%. Other regional banks also plummeted, including Zions (ZION), Comerica (CMA) and Key (KEY), which all fell between 9-12%.
One new point of pressure on these companies is being applied by short sellers who appear to be targeting lenders they perceive to be most vulnerable. Data from S3 Partners showed short sellers have increased their bets against regional bank stocks by more than $440 million over the last 30 days.
Since Friday, short interest in PacWest rose to more than 18% of shares, making it the second most shorted regional bank stock for the same period.
PacWest and Western Alliance were also among the financial institutions, along with First Republic, that came under intense scrutiny following the March 10 and March 12 failures of Silicon Valley Bank and Signature Bank.
Both lenders, like First Republic, lost a sizable amount of deposits during the first quarter as customers sought the perceived safety of larger banks or higher yields being offered by money market funds. PacWest, a lender based in Beverly Hills, Calif., lost 17% of its deposits and Phoenix-based Western Alliance lost 11%, while First Republic lost 41%.
Both PacWest and Western Alliance also reported drops in a key measure of profitability, a sign that the regional banking business is becoming more challenging as funding costs and interest rates rise.
Several big bank executives tried to argue Monday that concerns about the regional banking system should lessen with the seizure and sale of First Republic, including JPMorgan CEO Jamie Dimon: “This part of the crisis is over,” he said.
Another big bank CEO, Jane Fraser of Citigroup (C), on Monday cited “a palpable sense of relief” during an interview with Yahoo Finance. She called First Republic “the last remaining main uncertainty of the small handful of banks that did not do a good job with asset liability management.”
Antelopes and lions
But Dick Bove, financial strategist with Odeon Capital Group, said the short sellers who made a tidy profit betting against First Republic and Silicon Valley Bank are going to keep looking for new targets.
“The antelopes are being prowled by the lions here and the lions are going to find other ones to attack and bring down,” Dick Bove, financial strategist with Odeon Capital Group, told Yahoo Finance Monday, predicting other banks would still fail.
Investors, he said, are looking for banks that have large portfolios of fixed-rate mortgages, a lot of commercial real estate, and a gap between the bank’s real values and published values.
“People made a huge amount of money,” he said. “Those people who have driven SVB out of business, who benefitted from the Signature failure, who benefitted from the First Republic slow die, they made a lot of money.
“They are looking around to find another target.”
The downward pressure on certain bank stocks may not result in outflows from retail customers but it could lead to more from corporate customers, said Ryan Nash, Goldman Sachs’ managing director of regional banks.
It “does start to raise red flags and causes corporate treasurers and CFOs to say, ‘you know what, maybe I should think about diversification,’” Nash added.