First Horizon (NYSE:FHN) stock fell 40% overnight, and other regional bank stocks also crashed, after it terminated its merger with Toronto Dominion Bank (NYSE:TD).
PacWest (NASDAQ:PACW) fell 34%, and Western Alliance (NYSE:WAL) fell 14% after Federal Reserve Chairman Jerome Powell showed no urgency about regional banks while hiking interest rates a quarter-point.
The press conference signaled an all-clear for shorts to go after weak regional banks.
FHN Stock, Other Bank Stocks Under Attack
The First Horizon deal couldn’t get past regulators, because Toronto Dominion is based in Canada. The deal was worth $13.4 billion last year. First Horizon stock is now worth under $5 billion.
First Horizon, which is based in Memphis, said it had $89 billion in assets at the time of the deal. Its wealth-management unit claimed $32 billion under management. It’s among wealthy depositors that the greatest fear lies.
The regional bank crisis began in March with a run on SVB Financial’s (OTCMKTS:SIVBQ) Silicon Valley Bank, then spread to Signature Bank (OTCMKTS:SBNY) and First Republic, all of whom seemed healthy until they suddenly weren’t.
The problem is a disconnect between the value of assets bought when interest rates were near zero and their true value with interest rates at 5%. Banks first responded by keeping interest rates near zero on demand deposits. Depositors then moved their money to bonds and the banks lost their liquidity.
Deposit fears are especially acute in the West, where PacWest and Western Alliance are located. Other regional banks like Truist Financial (NYSE:TFC), Regions Bank (NYSE:RF) and Prosperity Bancshares (NYSE:PB) fell just 2-3% on May 3.
PacWest said it had $10.8 billion in cash on March 18. It said May 3 it is considering “strategic options” including a sale, despite reporting no unusual deposit flows.
Wetern Alliance issued a press release claiming it remains strong. But Moody’s downgraded its debt two notches, and 10 other regional banks were also downgraded.
What Happens Next?
The fear is real for regional bank stocks as speculators look for targets to short. Lending standards at all banks are likely to be tightened as a result, slowing the economy and helping the Fed fight inflation.
On the date of publication, Dana Blankenhorn id not hold (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.
