PacWest leads losses in regional bank stocks

May 9 (Reuters) – PacWest Bancorp ( PACW.O ) shares led declines in U.S. regional lenders on Tuesday as investors feared the ongoing banking crisis could deepen.

PacWest fell 5%, a day after the Los Angeles-based lender̵[ads1]7;s decision to cut its quarterly dividend failed to quell concerns about its financial stability.

The KBW Regional Banking Index (.KRX) fell 1.5% to stay near the 30-month low it hit last week following the collapse of First Republic Bank and PacWest’s decision to explore strategic options.

PacWest and Western Alliance, which have been at the heart of regional bank sales, saw the steepest drop in deposits in the first quarter after First Republic, according to data from S&P Global Market Intelligence.

“Deposit flight is most important to investors as the collapse of Silicon Valley, Signature Bank and First Republic coincided with mass deposit flight,” said Alexander Yokum, equity analyst at CFRA Research.

His view on regional banks is neutral as deflated valuations, relatively strong capital levels and robust credit quality are offset by fears of deposit outflows, slowing loan growth and heavy exposure to struggling office property.

Adding to the banking woes, U.S. firms of all sizes showed less demand for credit in the first quarter than three months ago, according to a Federal Reserve survey, in the first cross-sector sentiment measure since the recent spate of bank failures.

However, the tightening of credit conditions for US businesses and households in the first months of the year was likely due to the impact of higher interest rates rather than the cliff-like credit downturn that some feared after the collapse of Silicon Valley Bank, the Fed’s bank, in March. quarterly survey showed.

“We expect some credit erosion as the year progresses, but we also believe that banks have insight into the outlook and can handle any credit strains that emerge,” Jon Arfstrom, analyst at RBC Capital Markets, said in a note.

Western Alliance ( WAL.N ) fell 2.6%, while Customers Bancorp ( CUBI.N ) and First Horizon Corp ( FHN.N ) fell 4.7% and 3.4%, respectively, and Arfstrom noted that the decline in banking stocks overall, has made their valuations attractive.

Wall Street executives and banking analysts last week urged regulators to quickly provide more protection for bank deposits and consider other backstops, arguing that only one intervention can stop the crisis.

Since the start of first-quarter earnings, shares of midcap banks have lost 9% and are down a median of 29% since March 8, when the Silicon Valley bank announced the withdrawal, according to Morgan Stanley analyst Manan Gosalia.

He said the market reaction was overblown as there was no sign of more deposit outflows, although the cost of funds, loan growth and regulation could weigh on regional lenders.

Reporting by Medha Singh in Bengaluru, additional reporting by Bansari Mayur Kamdar; Editing by Arun Koyyur

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