Concerns about the US banking system are mounting again after Pacific Western Bank and First Horizon Bank both released updates that upset investors.
Los Angeles-based PacWest confirmed early Thursday that it is considering “all options,” including asset sales.
Tennessee-based First Horizon revealed that its $13 billion merger deal with TD Bank has been terminated.
PacWest shares fell 45 percent in early trading, while First Horizon shares fell as much as 40 percent, and concerns about the potential for contagion rattled shares of other regional banks.
It came just hours after Federal Reserve Chairman Jerome Powell tried to allay fears following the failure of three banks since March, saying at a Wednesday news conference that “the US banking system is sound and resilient.”
A number of banks have been thrown off balance by the Fed’s fight against inflation, and the central bank raised its key interest rate again this week by a quarter point, to the highest level in 16 years.
PacWest confirmed early Thursday that it is considering “all options,” including asset sales
PacWest shares fell 45 percent on Thursday
On Sunday, San Francisco-based First Republic Bank was seized by federal regulators and sold to JPMorgan Chase in the second largest bank failure in US history.
Then followed last month’s collapses of Silicon Valley Bank and Signature Bank of New York, which are now the third and fourth largest bank failures in US history.
In all three cases, concerns about the banks’ balance sheets led to a rush of customers taking deposits, driving them out of business.
PacWest and First Horizon are both smaller than the three recently failed banks. PacWest has assets of about $40 billion, while First Horizon has about $79 billion in assets.
Concerns about PacWest arose Wednesday night, with reports that the company was exploring strategic options, including a sale or injection of fresh capital.
In a statement early Thursday, the bank insisted it had not experienced any extraordinary deposit flows following First Republic’s bankruptcy over the weekend.
“Core customer deposits have increased since March 31, 2023, with total deposits totaling $28 billion as of May 2, 2023 with insured deposits totaling 75% versus 71% at the end of the quarter and 73% on April 24, 2023” , the statement said.
However, PacWest confirmed that it is continuing to explore “all options,” including the sale of strategic assets and talks with “various potential partners and investors.”
Investors have viewed PacWest as vulnerable in part because it is special exposed to fluctuations in commercial real estate.
Analysis by Barrons found that commercial real estate loans amounted to more than 375 percent of PacWest’s capital at the end of December — significantly above the 300 percent level recommended by federal guidelines.
In addition, the most volatile real estate loans, for land and construction, accounted for nearly 140 percent of the bank’s capital, providing the cushion for credit losses.
First Horizon issued a statement early Thursday saying its previously announced merger agreement with Canadian giant TD Bank had been terminated
First Horizon shares fell as much as 40 percent after the announcement
Fed Chairman Powell sought to allay fears following three bank failures since March, saying at a press conference on Wednesday that “the US banking system is sound and resilient”
Meanwhile, First Horizon issued a statement early Thursday saying its previously announced merger agreement with Canadian giant TD Bank had been terminated.
The merger was first announced in February, before the first signs of trouble in the banking system, but the two banks insisted the deal was called off due to regulatory concerns, rather than concerns about First Horizon’s stability.
“TD has informed First Horizon that TD has no timeline for obtaining regulatory approvals for reasons unrelated to First Horizon,” the statement read.
“Because there is uncertainty about when and if these regulatory approvals can be obtained, the parties have mutually agreed to terminate the merger agreement,” it added.
The deal has received more attention given recent events in the banking system, and TD Bank has sizeable operations in the US, potentially raising antitrust issues with regulators.
Meanwhile fears of contagion and instability drove stocks of other regional banks down in the pre-market
Shares of Western Alliance Bancorp fell 15 percent despite its efforts to reassure investors there had been no unusual deposit outflows
Zion Bancorporation fell 10.0 percent and Comerica fell 7.5 percent, while KeyCorp and Valley National Bancorp fell 8 percent and 5 percent. The SPDR S&P Regional Banking ETF lost 3.7 percent.
The common theme among bank stocks that sold off sharply is that they reported large deposit drops in the first quarter with California operations, Truist Securities analyst Brandon King said, calling the sell-off “exaggerated.”
Others feared concerns about regional US banks could continue to shake the industry without stronger intervention from regulators.
“It was hoped that the First Republic assets bought by JPMorgan would stabilize the rest of the industry, but it’s still a matter of confidence,” said Rick Meckler, partner at Cherry Lane Investments.
“I don’t think we want to be a country with only five big banks, so the Ministry of Finance will have to work to stabilize the situation a bit more.”