While the U.S. government took quick and extraordinary action to bolster confidence in the financial sector, regional banking firms continue to feel the heat, as evidenced by the midweek decline of PacWest Bancorp (NASDAQ:PACW). Despite the headwind associated with a loss of customer deposits, PacWest decided against a capital raise. However, the market apparently didn’t agree with the move, sending PACW stock down about 11%.
According to Barron’s, PacWest stated that as of March 20, Federal Deposit Insurance Corporation (FDIC)-insured deposits “exceeded 65% of total deposits. Community bank deposits stood at $15.1 billion, down 10.6% from the end of 2022. It also said that overall deposits, including those from venture capital, had dropped about 20%.”
Though problematic, PacWest noted that it has enough cash to navigate the troubled waters. Per Barron’s, “[i]t has drawn on several available federal facilities, including borrowing $3.7 billion from the Federal Home Loan Banks system, $10.5 billion from the Federal Reserve Discount Window, and $2.1 billion from the Bank Term Funding Program — all on March 20.”
Overall, PacWest claims a cash balance of $11.4 billion, exceeding its $9.5 billion in uninsured deposits. Therefore, management stated that a capital raise — particularly in this volatile environment for PACW stock — didn’t make sense.
In addition, Bloomberg reported that PacWest obtained $1.4 billion from a financing facility from Apollo Global Management-owned investment firm Atlas SP Partners. Though management believes these action items did enough for stability, investors don’t seem to agree.
PACW Stock Walks a Tightrope
To be fair, not everyone shares a pessimistic view of PACW stock. Interestingly, RBC Capital analyst Jon G. Arfstrom wrote in a note Wednesday that, “[w]ithout a willingness to raise capital at these levels, we would expect the company to continue to shrink the asset base, and these facilities do give management time to reduce assets, where possible, and ‘raise capital’ by shrinking the balance sheet.”
Certainly, on paper, PACW stock appears an enticing opportunity for contrarian investors. Data from Finbox reveals that PacWest scores an “A” grade for relative value. As well, it scores a “B” for profit health. Nevertheless, the financial institution walks a tightrope because of the broader banking sector fallout.
Specifically, Treasury Secretary Janet Yellen mentioned that the government stands ready to provide further guarantees of deposits if the banking crisis worsens, per CNBC. Naturally, such a statement reflects in the government’s mind a non-zero probability that additional bank runs may materialize.
Even more problematic, the accommodative profile of governmental backstopping may worsen inflation — the key challenge the Federal Reserve committed itself to tackle. In other words, more banking instability could unwind the painful initiatives undertaken last year.
Further, the Fed recently announced an interest rate hike despite deep concerns over the regional banks. With banking shareholders unlikely to receive support in case of a sudden collapse, the risk profile of PACW stock accelerated.
Why It Matters
Since the end of 2008, 513 bank failures have occurred, suggesting that investors shouldn’t fret too much. However, most of these collapses occurred in 2009 and 2010 as the economy wrestled with the Great Recession. Conspicuously, in 2021 and 2022, the failure tally was zero. Therefore, stakeholders of PACW stock should not be overconfident in their economic assessments.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.