(Bloomberg) — US bank stocks slid into the close on Wednesday following the Federal Reserve decision, extending Tuesday’s deep selloff after the failure of troubled lender First Republic Bank prompted investors to renew their scrutiny on the sector’s prospects.
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Western Alliance Bancorp, Zions Bancorp, and Comerica dipped on Wednesday alongside other regional lenders, with bank stocks selling off into the market close. The sector had tumbled on Tuesday, rattling broader markets amid heightened focus on the industry’s stability.
Federal Reserve chair Jerome Powell said that bank conditions had “broadly improved” since early March, though he noted that the sector’s strains “appear to be resulting in even tighter credit conditions for households and businesses.”
“While the bank space likely faces legitimate concerns regarding future profitability, we believe Western Alliance’s current and estimated future return metrics to warrant a dramatic multiple expansion from current levels,” Hovde Group analyst Ben Gerlinger wrote in a Wednesday note. He called Tuesday’s bank stock trading irrational. “The near historic low valuation offers a substantial risk/reward entry point.”
PacWest Bancorp slipped 2% and Western Alliance sank 4.4%, as Zions finished lower by 5.3% and Comerica dropped 4.4%. The KBW Regional Banking Index extended its weekly drop to 8.9%.
First Republic, acquired by JPMorgan Chase & Co. on Monday in a government-led deal, became the fourth US lender to collapse this year.
Bearish bets on regional banks have jumped in the last week, which may be adding to pressure in the shares. Short interest as a percentage of shares outstanding in the SPDR S&P Regional Banking ETF rose to 96% from 74% the week before, according to data compiled by S3 Partners.
“Though bank resolutions have worked as intended with stronger entities acquiring failed institutions, market negativity can destabilize even well-regarded banks like First Republic,” Bloomberg Intelligence analyst Herman Chan wrote.
While First Republic’s troubles stemmed from bad investments and a run on the bank’s deposits, the likes of PacWest and Western Alliance posted results last month that showed their deposit bases had stabilized, an encouraging sign for investors.
“None of the banks within BofA’s banks coverage universe experienced anywhere close to the stress of the three failed banks,” Bank of America Corp. analysts including Ebrahim Poonawala wrote in a note on Wednesday. “However, a persistent sell-off in stocks has the potential to inform deposit customer behavior and worsen the profitability challenges faced by certain banks.”
–With assistance from Matt Turner.
(Updates to add Federal Reserve decision and market close. Earlier version corrected Federal Reserve spelling in first paragraph.)
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