WSJ Renewal Edition.- Investors’ fears about the health of the banking industry in a high-interest-rate environment were evident as shares of several midsize lenders plummeted following the collapse of First Republic Bank. Banks such as Los Angeles-based PacWest, Phoenix-based Western Alliance, and New York’s Metropolitan Bank suffered significant losses, with the latter declining 20%, the former dropping 28%, and the latter falling 15% after the March collapse of Silicon Valley Bank.
The broader index of regional-bank stocks dropped by more than 5% to reach its lowest level since 2020. The biggest banks also fell, but the drops were less pronounced. Wells Fargo and Bank of America fell by 4% and 3%, respectively, while JPMorgan experienced a decline of almost 2%. Citizens, Truist, and U.S. Bank each shed about 7%. Although stocks were generally lower, the three major indexes each fell by about 1%.
Although JPMorgan CEO Jamie Dimon claimed that the banking panic that began with the Silicon Valley Bank run in March had ended after the seizure and sale of First Republic Bank to JPMorgan Chase, investors were unconvinced. Despite the banking turmoil, the Federal Reserve was expected to raise interest rates during its meeting later that week.
Silicon Valley Bank and First Republic were particularly vulnerable due to their heavy reliance on large, cheap deposits, especially as rising rates had prompted bank customers to move their money from checking accounts to products with higher yields, such as Treasuries. “The market always seems to be concerned about someone,” according to Barclays analyst Jason Goldberg. “With First Republic gone, they’re kind of looking for who else might be challenged.”
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PacWest and Western Alliance’s shares have been on a sharp decline since early March, and both banks serve many technology startups, a tight-knit group that proved fickle when the bank hit a rough patch. After double-digit outflows in the first quarter, deposits at both banks stabilized. PacWest stated that it would investigate “strategic asset sales” to improve liquidity.
Boston-based Loomis Sayles’ global banks analyst Julian Wellesley stated, “We may be moving into a chronic phase of the crisis. It’s a difficult outlook for regional banks.” After the first quarter, some believed that concerns about regional banks were overstated. Although many banks posted solid profits in the first quarter, a number of them missed Wall Street’s expectations.
RBC Capital Markets analyst Jon G. Arfstrom stated that the recent selloff in the sector reflected “unwarranted negative sentiment” rather than new information in a research note on Tuesday afternoon. Nonetheless, regional banks warned of a more challenging environment ahead, with several banks reporting modest deposit declines and lowering profit forecasts. They claimed that they would have to pay higher interest on savings accounts and certificates of deposits to keep customers around. Huntington Bank CEO Steve Steinour told The Wall Street Journal, “The failures created an inflection point for the industry.”