Shares of mid-sized U.S. lenders attempted to bounce back in volatile trading on Wednesday following a two-day tumble after the failure of a third major regional bank in two months fanned investor anxiety over stress in the sector.
PacWest Bancorp (PACW.O) shares gained 2.1% in early trading after tumbling 28% to close at their lowest level on record on Tuesday.
The KBW Regional Banking Index (.KRX) rose 1% after closing at its lowest level since December 2020.
The plunge in shares despite the seizure of First Republic Bank (FRC.N) and its assets sale to JPMorgan Chase & Co (JPM.N) “does not translate into the same thing as a run on those banks; rather, it just shows investor unease with the outlook for those banks,” said analysts at Brown Brothers Harriman.
“Because that outlook is still unknown, markets did what they always do in these situations and assumed the worst.”
Investors are also focused on the impact of higher interest rates on the banks’ portfolios.
In particular, banks’ exposure to commercial real estate loans has come into focus, as demand for office space cratered due to a surge in remote working since the COVID-19 pandemic.
Evercore ISI analysts lowered their 2023 earnings outlook for regional lenders. The brokerage now estimates a nearly 1%decline from a year earlier, compared to an already lowered expectations of a 4% growth, blaming it on intensifying funding cost pressures amid declining regional bank deposits.
Later in the day, the U.S. Federal Reserve is expected to deliver a 25 basis-point interest rate hike and comment on the recent bank failures.
The fear “is that there is going to be another bank (to fall). If the Fed continues to raise rates and doesn’t pause, that is only going to create a bigger problem because most of these regional banks are suffering because of the higher rate structure,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.
Meanwhile, short sellers have pocketed $1.2 billion in paper profits betting against regional lenders in the first two days of May, with Truist Financial Corp (TFC.N) and PacWest generating the highest gains, analytics firm Ortex said.