Another Bank is Facing Significant Financial Difficulties

by Wall Street Rebel - Michael London | 05/04/2023 8:52 AM
Another Bank is Facing Significant Financial Difficulties

The stock prices of PacWest Bancorp experienced a dramatic decline during pre-market trading on Thursday. The bank has asserted its stability but is considering "all options" with prospective partners and investors.


After its shares plummeted, PacWest Bancorp, the most recent regional bank to experience stress, announced on Thursday that it is looking to raise money through asset sales and new investments.

In pre-market trading, the Los Angeles-based bank's shares fell 42% after Bloomberg News reported that it was considering a sale. Investors worried that PacWest might be the newest bank to fail, which caused the stock to decline by 85% since the bank collapsed in early March.

Since Monday, when JPMorgan Chase intervened to acquire First Republic, another troubled regional bank, shares of the Beverly Hills, California-based bank have fallen 37%. After Bloomberg News reported that the bank was considering its strategic options, including a sale, the stock price of PacWest fell by as much as 55% in after-hours trading.

According to Dow Jones Market Data, if PacWest stock closed at these levels, it would be the greatest percentage drop ever recorded and a low for shares.

PacWest's $40 billion in assets is far less than that of Silicon Valley Bank and First Republic Bank, whose respective pre-failure asset totals were $209 billion and $230 billion. Despite having very different sizes, these banks do share some characteristics.

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In a relatively short amount of time, the assets of all three companies increased significantly. Between 2019 and the end of 2022, PacWest's assets increased by 58%. The assets of Silicon Valley Bank also increased by 64% during that time. Lenders, investors, and regulators should constantly be on the lookout for sudden asset expansion as a sign that a bank may be letting go of underwriting rules or that it lacks the staff or technology resources to assess the risk of such assets.

According to Dow Jones Market Data, if PacWest stock closed at these levels, it would be the greatest percentage drop ever recorded and a low for shares.

 According to PacWest, conversations with partners and investors are still underway.

"Several prospective partners and investors have recently contacted the firm; talks are still underway. In order to maximize shareholder value, the firm will continue to consider all possibilities, according to the lender.

Additionally, the business paid off $1 billion in debt with its excess cash and claimed that its liquidity remains strong, exceeding its uninsured deposits by 188%.

One of the banks that have experienced the greatest strain since Silicon Valley Bank's demise is PacWest. Since then, banks with substantial amounts of uninsured deposits or loan books with greater risk have seen a run on deposits.

Gary Tenner, an analyst at D.A. Davidson, said that the stock of PacWest was "not trading on fundamentals, given market fears." He lowered the shares from Buy to Neutral. After PacWest's update, which they deemed "helpful," RBC Capital Markets analysts were more upbeat and kept their Outperform rating.

Banks responded to the news that the Federal Reserve raised interest rates for the tenth time this cycle on Wednesday in addition to worries about PacWest. Higher interest rates strain banks by making borrowing more expensive, possibly putting customers under pressure, and reducing the number of individuals seeking loans. On Thursday, shares of other local lenders also dropped.

Contrary to the recently closed First Republic Bank, PacWest claimed that it had not "experienced out-of-the-ordinary deposit flows." The lender said that it had adequate cash on hand to cover uninsured deposits and that its deposits have actually climbed since March 31.

The bank stated that the sale of its $2.7 billion portfolio of lender financing loans was still on schedule and, when completed, would raise its common equity tier-one ratio from 9.21% to at least 10%.

In a statement, PacWest said that "the company will continue to evaluate all options to maximize shareholder value."

After the incredibly quick bank run on Silicon Valley Bank, First Republic Bank, a regional lender with headquarters in San Francisco, lost close to $100 billion in deposits. On Monday, the bank was taken over by federal authorities, who also supervised its sale to JPMorgan Chase.

A significant test for the banking system is the issue with PacWest. After safeguarding all uninsured savings at the defunct Silicon Valley Bank and Signature Bank, federal officials concluded they had successfully prevented further bank robberies.

Jerome Powell, the chairman of the Federal Reserve, said on Wednesday that First Republic Bank was the last piece to fall in the financial crisis. The shares of local banks, however, fell following his news presentation.

"There were three major banks that were really at the center of the tremendous period of stress that we observed in early March from the beginning. All those issues have now been rectified, and all depositors have been safeguarded," Powell told the media.

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                       PacWest Weighs Strategic Options, Including a Sale

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