The Fragility of the US Regional Banking System: PacWest Bancorp’s Dividend Cut and Strategic Options
Shares of PacWest Bancorp (PACW) saw a surge of 19% early Monday after the bank announced it was cutting its dividend from 25 cents per share in the previous quarter to 1 cent per share late Friday. The move was made to preserve capital amid current economic uncertainty, recent volatility in the banking sector, and potential changes in regulatory capital requirements. PacWest Bancorp’s CEO, Paul Taylor, stated that the company views the dividend cut as a prudent step to accelerate its plans to build capital to CET1 of 10%+. The bank’s shares rose in pre-market trading at the time of writing on Monday after the announcement of a quarterly cash dividend of $0.01 per common share payable on May 31, 2023, to stockholders of record at the close of business on May 15.
However, PacWest’s shares plunged in after-hours trading after Bloomberg News reported that the bank was considering strategic options, including a sale or a fundraising round. The bank has approximately $44 billion in assets, compared with more than $200 billion for SVB. After discovering that regional bank PacWest Bancorp was contemplating a sale, investors were taken aback as the company's shares plummeted by over 39% on Wednesday night. The shares were subsequently halted for volatility numerous times on Thursday. PacWest Bancorp is headquartered in San Francisco. The bank has stated that there haven't been many customer withdrawals, but the announcement has still sparked concerns about a possible increase in withdrawals at other local banks.
PacWest is not the only US regional bank facing challenges. Heavyweights in the financial industry, such as hedge fund billionaire Bill Ackman and former Federal Reserve Bank of Dallas President Robert Kaplan, are warning of more banking stress to come. Ackman expressed his belief that the entire regional banking system in the United States is in jeopardy before PacWest released its statement. “Confidence in a financial institution is built over decades and destroyed in days,” Ackman wrote on Twitter. “As each domino falls, the next weakest bank begins to wobble.”
The reasons for the banking sector’s fragility include the fact that many banks increased their holdings of bonds during the pandemic, when deposits were plentiful but loan demand and yields were weak. The unrealized losses of several banks will remain only on their records. The Federal Reserve Bank of St. Louis states that some individuals could encounter real financial setbacks if they need to sell securities for liquidity or other purposes.
The situation is compounded by the fact that the US government is facing a debt ceiling crisis, which could be catastrophic if not resolved. Treasury Secretary Janet Yellen has warned that the government will hit the debt ceiling on or around June 1 unless Congress raises its borrowing authority. The political threat is amplified by banking sector fragility.
Investors are also concerned about the possibility of more bank failures, with a study on the fragility of the US banking system finding that 186 banks are at risk of failure, even if only half of their uninsured depositors decide to withdraw their funds. A run on these banks could pose a risk to even insured depositors, those with 250,000 US dollars or less in the bank, as the Federal Deposit Insurance Corporation's (FDIC) deposit insurance fund starts incurring losses, the economists wrote.
Amidst all this, PacWest Bancorp’s shares are rebounding, with the bank’s shares at 80% plus as of May 5. Western Alliance Bancorp’s shares are also up over 40%. However, the situation remains uncertain for the US regional banking system, and investors are advised to exercise caution.
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