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Bank stocks drop again as PacWest free fall ‘feeds that narrative’ of weakness despite a ‘fundamentally sound’ business

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Western Alliance Bancorp, PacWest Bancorp and First Horizon Corp. posted steep losses Thursday as clouds hung over the banking sector a day after the U.S. Federal Reserve hiked interest rates by a quarter-point.

First Horizon
FHN,
-33.89%

dropped 36% after it said its merger with Toronto-Dominion Bank
TD,
+0.82%

TD,
+0.12%

would not close, some 15 months after the deal was announced. Jefferies analyst Casey Haire said First Horizon’s standalone stock valuation without the merger is about $11 to $13 a share, 20% below where the stock was trading on Wednesday.

Trading in Western Alliance Bancorp.’s
WAL,
-32.72%

stock was halted after the bank issued a strong denial of a Financial Times report that it is exploring a sale. Earlier, the stock fell 39% to $18.05, below its 2005 initial public offering price of $22 a share.

“There is not a single element of the article that is true,” Western Alliance said.

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Meanwhile, Western Alliance said late Wednesday that it hasn’t experienced unusual deposit flows following the sale of First Republic on Monday. Its deposits increased $1.2 billion to $47.6 billion between March 31 and May 3, the bank said.

The KBW Nasdaq Bank Index
BKX,
-3.81%

dropped 3.4%, the SPDR S&P Regional Banking exchange-traded fund
KRE,
-5.42%

moved lower by 4.9% and the Financial Select SPDR ETF
XLF,
-1.60%

fell 1.5% Thursday.

PacWest
PACW,
-45.17%

shares dropped another 48% to bring its year-to-date loss to about 85% after Bloomberg reported that the bank is considering a potential sale.

PacWest said it had explored strategic asset sales, including its $2.7 billion lender-finance loan portfolio, and confirmed that it has been approached by “several potential partners and investors,” with discussions now ongoing.

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PacWest also said it has not experienced out-of-the-ordinary deposit flows following the sale of First Republic Bank and other news. Its core customer deposits have increased since March 31, with deposits totaling $28 billion as of May. Insured deposits grew to 75% from 71% at the end of the first quarter.

Read more: Why First Republic’s rescue isn’t arresting a selloff in U.S. regional-bank stocks

PacWest said it “will continue to evaluate all options to maximize shareholder value.”

Citi analyst Keith Horowitz said in a research note that the weakness in PacWest’s stock comes amid investor concerns tied to mark-to-market losses on the asset side of the balance sheet, combined with deposit flight due to reliance of banks on uninsured deposits, which leads to concerns about solvency.

“The recent [PacWest] news only feeds that narrative, and many investors for now are waiting this one out, which has created an air pocket for the stocks,” Horowitz said. “This creates a near-term challenge, but we believe the business models for our universe are fundamentally sound and we believe this selloff has created very attractive long-term opportunities.”

D.A. Davidson analyst Gary Tenner downgraded PacWest to neutral from buy and cut the stock’s price target to $3 from $19 because the stock continues to trade “untethered from fundamentals,” he said.

PacWest’s deposit stabilization, planned asset sales and its path back to a Common Equity Tier 1, or CET1, ratio of 10%-plus could be seen as positive catalysts, but the stock continues to slide, he said.

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Barbara Kollmeyer, Ciara Linnane and Emily Bary contributed to this report.



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