(Bloomberg) — Backwest Bancorp led a rebound across US regional banking stocks after a week of losses, joining a broader rally across US stock futures ahead of jobs data later in the day.
Most Read from Bloomberg
Shares of PacWest gained as much as 26% in US premarket trading on Friday, while shares of Western Alliance Bancorp and First Horizon Corp were up 15% and 7%.
Investor panic about regional banks began in March with concerns about a handful of lenders who had made large unrealized losses on bond investments or large proportions of uninsured depositors. Despite moves from regulators to address these issues, investors cited new concerns including banks’ higher exposure to mortgage lending and general unease about leaving deposits for higher-yielding alternatives.
The government’s seizure and sale of First Republic Bank earlier this week and a report that BacQuest was exploring strategic options revived market jitters, dragging peers back. The rout extended to the largest lenders, as the KBW Bank index posted an 11% drop this week.
Shares of PacWest plunged 51% Thursday in their worst single-day loss ever, after the Beverly Hills-based lender confirmed it was in talks with several potential investors. The Western alliance fell 38 percent, reversing an earlier drop after denying a report that strategic options were being explored. First Horizon regressed after the collapse of its proposed $13.4 billion merger with Toronto-Dominion Bank.
While some investors, including billionaire hedge fund billionaire Bill Ackman, have warned that there could be more pain ahead, others have indicated that the downturn has gone too far. Federal Reserve Chairman Jerome Powell said the First Republic’s decision after regulators took control of the lender was an “important step toward drawing a line” amid the banking turmoil.
“It’s difficult to reconcile the tension between weak market sentiment and strong regional bank liquidity as investors take a very hawkish view of banks’ capital and operating models,” said Herman Chan, an analyst at Bloomberg Intelligence.
In what could come as a relief to small lenders, Bloomberg News reported Thursday that the Federal Deposit Insurance Corporation is preparing to exempt them from paying additional money to replenish the Deposit Insurance Fund. The report said those with assets of less than $10 billion would not have to pay up.
The FDIC plans to issue a highly anticipated proposal next week to refill the fund, which has been depleted in part by the failure of the Silicon Valley bank and signature bank, people familiar with the matter said.
Equity trades betting on regional lenders have generated up to $7 billion in paper profits so far this year, according to research by S3 Partners. But some experts said a potential policy fix might put an end to the brief jams.
Read more: Short sellers targeting US banks risk painful pressure
“While it’s hard to see a catalyst for regional banks to turn around right now, it’s a very popular and very crowded sell that could be due to stress at some point,” said Chris Murphy, co-head of derivatives strategy at Susquehanna. international group.
In an effort to calm jittery investors, Backwest said this week that core deposits have risen since March and “has not seen unusual deposit inflows following the First Republic sale and other news.” The company said insured deposits rose to 75%.
The Western alliance said it did not see unusual inflows of deposits after the collapse of the First Republic. The company said insured deposits accounted for more than 74% of its total.
— With assistance from Joanna Osinger, Ishika Mukerji, and Michael J. Moore.
(Updates with the FDIC proposal in the seventh paragraph.)
Most Read from Bloomberg Businessweek
© 2023 Bloomberg LP