While JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon expressed confidence Monday that the resolution of First Republic Bank’s failure represents an initial stage victory against an impending financial crisis, Tuesday’s implosion of PacWest Bancorp (NASDAQ:PACW) reignited stability concerns. With investors rushing for the exits, the double-digit decline in PACW stock dragged down the major indices.
As PBS pointed out, First Republic’s collapse represented the second-largest bank failure in U.S. history. Unsurprisingly, the news startled investors, who refocused on the viability concerns of other regional banks. While PACW stock took the brunt of the damage, falling about 25% in early afternoon trading following a circuit breaker halt, its peers also fared poorly. For instance, Western Alliance (NYSE:WAL) gave up about 18% of its equity value.
According to Bloomberg, despite Dimon’s reassurances, investors now look to the possibility of higher interest rates posing additional obstacles to PACW stock and its ilk. Also, stress on the commercial real estate industry casts a dark cloud over the banking sector.
“While FRC resolution is a good sign, we haven’t had a clear solution to the lack of confidence across regional banks and may need a more holistic response from regulators or the government,” Bloomberg Intelligence analyst Herman Chan said in a message.
The Clock Ticks for PACW Stock
According to NBC News, one of the main fears regarding PACW stock and its peers centers on consolidation and subsequent constriction of the financial sector, leaving ambiguities about long-term profit outlooks for mid-sized regional banks.
In a research note to clients on Sunday, KBW analyst David Konrad stated:
“We believe that banks with assets >$500B and <$60B are the clearest winners in the new world order, while there is likely to be a no-man’s land between $80-120B, as banks in this range may need to shrink to avoid new regulations or more actively engage in M&A to increase scale and absorb regulatory costs.”
Another headwind for PACW stock is the incentivization structure for regional banks, or the lack thereof. According to CBS News, First Republic shareholders will most likely be wiped out. Further, a JPMorgan spokesman stated that impacted FRC shareholders will not receive shares of JPM.
In other words, the federal government’s protections are focused on FRC depositors, not shareholders, which aligns with prior lifelines. In March, a joint statement by the Department of the Treasury, Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) stated that depositors of SVB Financial (OTCMKTS:SIVBQ) will have access to all their money.
However, shareholders and unsecured debtholders would not be protected. Therefore, many investors see little reason to risk holding onto PACW stock.
Why It Matters
For the optimists, TipRanks notes that PACW stock carries a moderate buy consensus rating. This breaks down to three “buys,” five “holds” and zero “sells.” Overall, the average price target lands at $17.17, implying about 150% upside potential. Still, opinions can change as analysts digest the latest developments.
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.
