Markets are still recovering from last week’s catastrophic events when SVB Financial’s (NASDAQ:SIVB) principal subsidiary, Silicon Valley Bank collapsed. When the financial institution announced an inability to cover its losses and a plan to issue new shares, it triggered a bank run that ultimately caused the U.S. government to step in and take control.
As Nasdaq halted trading on SIVB stock and several of its peers, the entire banking sector plunged to staggering lows. Trading has resumed for most bank stocks but not all. New York’s Signature Bank (NASDAQ:SBNY) has been shut down after regulators ruled that it posed “systemic risk” to the industry. Both large and small banks have been struggling since last week and are only starting to make progress today. As NPR reports:
“The declines come despite an emergency measure by regulators to protect depositors at Silicon Valley Bank and Signature Bank on Sunday, as well as comments by President Biden on Monday to reassure Americans about the safety of bank deposits.
“Investors are nonetheless concerned that other banks, especially smaller and regional lenders, would be unable to meet any surge in redemption requests even after the Federal Reserve said on Sunday it would make funding available for banks that require them.”
With these valid concerns in mind, investors are considering an important question; will more banks fail? And if they do, which one will be next? William Isaac, former chair of the Federal Deposit Insurance Corporation (FDIC) recently told Politico that he has no doubt that more banks will collapse, though he did not specify which ones. However, the question warrants some further examination.
Let’s take a closer look at bank stocks that investors may want to avoid due to their company’s chance of going under.
First Republic Bank (FRC)
As First Republic Bank (NYSE:FRC) shares plunged yesterday, investors wondered if it would be the next of the bank stocks to fail. These concerns are well founded, especially as the company is based in San Francisco, California, and specifically caters to clients in high economic brackets.
It’s not hard to draw parallels between it and Silicon Valley Bank. Yesterday, the New York Times reported that First Republic appeared to be under pressure from both investors and regulators. The banking industry is under intense scrutiny and investors are clearly nervous about the future of banks like First Republic.
It’s hard to ignore the fact that investor confidence in FRC stock is clearly low. Yesterday, the company reported that it had secured additional funding from both the Federal Reserve and JPMorgan Chase (NYSE:JPM), but shares only fell, indicating that the market didn’t care.
As the Times notes, “First Republic reflects investor fears about banks’ health.” While it’s true that investors are likely more worried about the industry as a whole than about this specific company, it will still be a long road back to recovery for FRC stock. Right now is just not a good time to be a bank with ties to the Silicon Valley area or client base.
Western Alliance (WAL)
Similar to SIVB, Western Alliance (NYSE:WAL) saw shares halted amid the market chaos last week as its shares plunged. Trading has since resumed for the Phoenix, Arizona-based company, but shares are still down almost 50% for the week.
The company is currently trending upward on news that hedge fund manager Ken Griffin recently disclosed a 5% stake in WAL stock. That said, it’s hard to ignore the fact that Western Alliance suffered its worst single-day selloff in company history yesterday.
Even with Griffin’s investment, it is quite understandable that investors would want to approach WAL with caution. The company’s holdings include Bride Bank, based in San Jose, California, a city adjacent to Silicon Valley. As InvestorPlace Financial News Writer Brenden Rearick reports:
“These ties are adding to a growing fear of a banking contagion — one which has WAL stock on the ropes. While the company has said most of its deposits are insured and liquid, an outpouring of 56 million shares of WAL on the stock market is dropping prices by over 46% today.”
Like First Republic, Western Alliance has ties to the troubled area, which is likely to make investors nervous, even as the stock rebounds.
PacWest Bancorp (PACW)
According to the Bing chatbot, PacWest Bancorp (NASDAQ:PACW) has had significant exposure to Silicon Valley Bank due to lending and deposit activity. There doesn’t seem to be any information to confirm that, but what we do know is that PACW stock has many of the same strikes against it as other bank stocks on this list.
This bank holding company may be based in Southern California, but it still boasts significant ties to the venture capital community. As the Wall Street Journal reports, “more than two-thirds of PacWest’s lending portfolio is tied to real estate, with a sizable portion lent to venture-capital firms.”
As it stands, neither of those bodes well for the company. Deep ties to the venture capital world are troubling enough for investors, but this isn’t a great time to be in real estate either, as speculation of a pending housing market crash continues to abound.
However we look at it, it’s hard to be optimistic about the stock’s chances for recovery, even as shares rebound today. Although several company insiders recently purchased PACW stock, that doesn’t necessarily mean the company is stable or that the troubles plaguing the sector are over.
On the date of publication, Samuel O’Brient 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.