First Republic rescue fails to stop further declines – 5/2/2023 – Market

This week’s bailout of First Republic failed to stem the sell-off in regional bank shares, which fell sharply on Tuesday morning as investors digested JPMorgan’s takeover of the troubled Californian bank.

Trading in shares of PacWest, considered one of the weakest of the mid-sized regional banks, was briefly suspended due to instability and had fallen 25% in mid-market trading in New York. The drop put PacWest on course for its worst daily decline since March 10, when the collapse of Silicon Valley Bank put pressure on the entire industry. Western Alliance suffered a drop of more than 20%.

The two banks have come under scrutiny because of their similarities to Silicon Valley Bank and First Republic, which was taken over by the Federal Deposit Insurance Corporation (FDIC), the US federal organization that insures bank deposits, after suffering massive deposit leaks and large accounting losses on long-term assets.

JPMorgan bought First Republic’s deposits and most of its assets on Monday, but the bank’s shareholders lost all the money they had invested in it.

“The market is moving from one weak bank to the next. And it’s not just short sellers, it’s also customers asking if their deposits are safe,” said Chris Whalen, president of Whalen Global Advisors. “The market is focusing on the weakest links in the chain and looking for those who are vulnerable.”

The KBW Index of Regional Bank Stocks was down more than 5% in morning trading. Utah-based Zions Bancorp suffered the biggest drop in the S&P 500 index, with a 13% decline.

A banking analyst pointed to a caveat in comments made by JPMorgan Chase Chief Executive Jamie Dimon after the First Republic acquisition. While he said Monday’s bailout of the Californian bank “solves pretty much all the problems,” he said “there may be another, smaller bailout to come.”

“People are latching on to that comment,” the analyst said.

Michael Metcalfe, director of macroeconomic strategy at State Street Global Markets, said “market jitters are understandable” after the First Republic crash.

However, he noted that long-term investors have been buying more bank shares in recent weeks, suggesting “neither panic nor broader contagion”. He added: “The implication is that price movement [na terça-feira] is more oriented to speculation”.

Shares in the big banks were also down, albeit less sharply, with Goldman Sachs and Morgan Stanley both down about 2% each. JPMorgan fell about 1.4%.

Banking stocks tend to be highly cyclical and the Bureau of Labor Statistics, a federal agency, reported on Tuesday that the number of job openings had fallen to the lowest level since May 2021, amid growing fears that the US is about to breach its debt ceiling.

Several top investors and executives warned of the potential for further fallout after the wave of bank failures.

David Hunt, executive chairman of PGIM, told attendees at the Milken Institute conference in Beverly Hills Monday that “we’re just getting started [a ver] the implications for the US economy,” while Rishi Kapoor, co-president of Investcorp, said that “there is no doubt that the second- and third-round effect on the banking sector… will cause tightening financial conditions.”

Regional banks are particularly exposed to the commercial real estate sector, which has recently emerged as an area of ​​concern due to its exposure to higher interest rates and fears that the prevalence of work from home will reduce demand for offices.

In an interview with the Financial Times over the weekend, Charlie Munger of investment group Berkshire Hathaway warned that regional banks were “burdened” with bad loans to the commercial property segment.

Investors have been betting heavily on further declines in the shares of some mid-sized banks, and short interest in California-based PacWest is particularly high. However, the level of short selling activity has barely changed over the last month, according to data from Markit.

Midsize banks, with assets of between $100 billion and $250 billion, are also a cause for concern, as US regulators say they plan to tighten enforcement and regulatory requirements, which is likely to increase costs and will affect the profits of smaller banks.

Worries about the national debt ceiling may also be contributing to the slide in bank stocks, said Casey Haire, equity analyst at Jefferies Bank. “It messes with the yield curve [do Tesouro]”, he added. “An inverted yield curve is never good for banks.”

Financial Times, translated by Paulo Migliacci