PacWest shares plunge as US regional banking conditions deteriorate

May 4 (Reuters) – Shares in PacWest Bancorp ( PACW.O ) plunged on Thursday, dragging down other regional lenders after the Los Angeles-based bank’s plan to explore strategic options sparked investor worries of a widening financial crisis.

PacWest̵[ads1]7;s stock fell more than 40% in afternoon trading, hitting a record low. The bank had on Wednesday confirmed an earlier Reuters report that it was exploring strategic options, including a potential sale or capital raising.

Western Alliance shares pared losses after falling nearly 60% following a Financial Times report that the lender was exploring strategic options, including a potential sale of all or part of the business.

The Western Alliance denied the FT report, calling it “categorically untrue in all respects”, and said it was weighing legal options against the paper. The bank’s stock fell nearly 35% in afternoon trading.

Western Alliance has sought to reassure investors of its financial stability. On Wednesday, it said it had not seen unusual deposit outflows following the sale of collapsed lender First Republic Bank to JPMorgan Chase & Co ( JPM.N ) on Monday.

First Republic’s collapse, the third major casualty in the biggest crisis to hit the U.S. banking sector since 2008, renewed a slide in shares of regional lenders this week despite regulatory efforts to stem the turmoil that began with the collapse of Silicon Valley Bank in March .

US officials at the federal and state levels are considering the possibility of “market manipulation” behind big moves in bank share prices in recent days, a source familiar with the matter told Reuters on Thursday.

“No one knows where these banks should trade because what we saw with Silicon Valley Bank is that fundamentals can change so quickly,” said Tom Plumb, portfolio manager at Plumb Balanced Fund in Madison, Wis.

“This would normally have been a great opportunity to buy banks with prime regional presence, and it might be, but the real concern is that nobody knows what the rules are and what they’re valued at,” Plumb added.

Zion Bancorp ( ZION.O ) fell 12% and Comerica ( CMA.N ) fell nearly 11%. KeyCorp ( KEY.N ) and Valley National Bancorp ( VLY.O ) were down 7% and 4%, respectively. The KBW Regional Banking Index (.KRX) fell 3.3%.

Major U.S. banks also lost ground Thursday, with the S&P 500 Banks Index (.SPXBK) falling nearly 3%. JPMorgan shares fell 1.4%, while Bank of America ( BAC.N ) fell 3%.

The common theme among bank stocks that have sold off sharply is that they reported big deposit declines in the first quarter, Truist Securities analyst Brandon King said, calling the selloff “exaggerated.”

PacWest Bancorp reported a loss of $1.1 billion attributable to shareholders for the first quarter of the year.

The stock has lost 72% of its value this year, making it one of the worst performers on the small-cap S&P 600 regional banks index (.SPSMCBNKS), which has lost a third of its value over the same period.

In another sign of stress in the regional banking sector, First Horizon Corp ( FHN.N ) and Toronto-Dominion Bank Group ( TD.TO ) announced on Thursday that they agreed to end their $13.4 billion merger amid uncertainty over securing regulatory approvals for the agreement.

First Horizon shares plunged 32% on the news, while US-listed Toronto-Dominion Bank shares rose nearly 0.5%.

US Federal Reserve Chairman Jerome Powell reiterated on Wednesday that the banking system remains resilient despite “strains” in March, after the central bank delivered a 25 basis point rate hike and signaled a pause in the tightening cycle. Powell also said bank deposits had stabilized.

“The Fed would of course react if a chaotic outflow of deposits from regional banks resumes,” Citigroup analysts wrote in a note to investors. “This risk is more elevated following recent banking developments and can never be completely taken off the table.”

Reporting by Medha Singh in Bengaluru; Editing by Vidya Ranganathan and Kim Coghill

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