PacWest Bancorp rose as much as 42% in premarket trading Monday, leading gains in US regional banks after saying its business remains “sound” and that it was cutting its quarterly dividend to one cent to accelerate capital build plans.
Other regional lenders Western Alliance Bancorp and Zions Bancorp also rallied as they recovered from a selloff fueled by worries over the health of the financial system and the recent collapse of several peers. The bounces follow a tumultuous week for regional lenders that ended with a sharp rally higher on Friday, led by PacWest.
“This dividend reduction makes sense and can help the pace of capital building,” RBC Capital Markets analyst Jon Arfstrom wrote in a note to clients. The company described its business “as ‘fundamentally sound’ which can be subject to interpretation, but it is a statement of confirmation that trends are manageable.”
Four regional banks have collapsed since turmoil started in early March, turning investor attention to jitters over unrealized losses on bond investments and deposit levels. Exposure to real estate lending has also been in focus.
The KBW Regional Banking Index dropped 8% last week, the worst weekly decline since mid-March, when the crisis started. But bank stocks bounced on Friday, ending the week on a high note as PacWest surged 82% for its best single-day advance on record. The stock remains down 75% this year.
For PacWest, short interest as a percentage of float has surged to nearly 19% in recent weeks, according to data from S3 Partners data.
“The potential for a meaningful dividend cut shouldn’t come as a surprise to investors,” Keefe, Bruyette & Woods analyst Christopher McGratty wrote, especially given the stock’s current valuation and that the firm is “in the midst of a strategy shift that prioritizes capital build.”
The S&P 500 financials index is on the verge of falling back below its 2007 peak. If it were to fall through that barrier now, it would be an ominous signal for the broader stock market, said hedge-fund manager Jim Roppel, founder of Roppel Capital Management.
Possible positive catalysts for US bank shares include the Federal Deposit Insurance Corporation expanding deposit insurance and the Fed discussing the road map for ending quantitative tightening, Morgan Stanley analysts wrote in a note Monday.
Still, there are doubts over the stability of these banks. Rating agency Fitch has placed PacWest on “Rating Watch Negative,” citing the impact of a potential transaction from the strategic review it is undertaking and “the uncertainty regarding the bank’s strategic direction.”
(Updates to add RBC comments in third paragraph)
Author: Macarena Muñoz and Bre Bradham