The banking sector has faced several headwinds since March, and the problems look far from subsiding. Despite assurances by the financial regulators, concerns over the banking system's stability remain.
The lack of investors’ confidence in banking stocks after the bank failures has led to a broad-based selloff in the regional banking industry. PacWest Bancorp (PACW) has also seen its stock price plummet after the bank confirmed that it was weighing various strategic options, including a sale. Amid the uncertainty surrounding PACW, shorting the stock now could be wise.
Earlier this month, the First Republic Bank (FRB) became the second-largest bank to fail in U.S. history, with the majority of its business being sold to JPMorgan Chase & Co. (JPM). FRB suffered a bank run causing the Federal Deposit Insurance Corporation (FDIC) to seize control and sell it to JPM. FRB was the third bank failure in 2023 after the collapse of Silicon Valley Bank and Signature Bank.
First Republic Bank’s (FRB) sale to JPM was to protect the depositors, but this sale wiped out the shareholders and bondholders of FRB. Similar concerns are now troubling PACW’s shareholders. The bank has announced that it was exploring the sale of strategic assets, including the sale of its Lender Finance portfolio for $2.7 billion.
The bank expects the completion of the sale to accelerate its CET1 capital ratio to 10%+, up from 9.21% for the first quarter of fiscal 2023. The bank said that its core customer deposits have increased since March 31, 2023, with total deposits as of May 2, 2023, coming in at $28 billion. Insured deposits as on May 2, 2023, were 75% compared to 71% at the end of the first quarter.
The bank has been working with a financial advisor, and according to people familiar with the matter, PACW may even be considering a breakup or a capital raise. The complete sale of the bank looks unlikely as there are not many potential buyers interested in buying the entire bank, as the potential buyer would also have to book a huge loss.
PACW’s stock has declined 74.9% in price year-to-date and 82.6% over the past year to close the last trading session at $5.76.
Here’s what could influence PACW’s performance in the upcoming months:
Disappointing Financials
PACW’s adjusted earnings for the first quarter ended March 31, 2023, declined 25.5% year-over-year to $89.44 million. Its adjusted EPS came in at $0.66, representing a decline of 34.7% year-over-year. The company’s adjusted return on average assets came in at 0.85%, compared to 1.22% in the prior-year quarter.
Its net interest income after provision for credit losses declined 10.5% year-over-year to $276.27 million. In addition, its total nonperforming assets increased 33.5% year-over-year to $89.26 million.
Weak Analyst Estimates
Analysts expect PACW’s EPS and revenue for the quarter ending June 30, 2023, to decline 74.3% and 32.2% year-over-year to $0.26 and $245.38 million, respectively. Its EPS and revenue for fiscal 2023 are expected to decline 60.9% and 26.4% year-over-year to $1.55 and $1.05 billion, respectively.
Poor Profitability
PACW’s trailing-12-month net income margin is negative 67.36% compared to the 25.89% industry average. Likewise, its trailing-12-month Return on Common Equity is negative 28.90% compared to the 11.10% industry average. Furthermore, the stock’s negative 2.01% trailing-12-month Return on Total Assets compares to the industry average of 1.13%.
POWR Ratings Reflect Bleak Prospects
PACW has an overall D rating, equating to a Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. PACW has an F grade for Sentiment, in sync with its weak analyst estimates. It has a D grade for Quality, consistent with its poor profitability.
Its 1.36 beta justifies its D grade for Stability.
PACW is ranked #40 out of #44 stocks in the F-rated Pacific Regional Banks industry. Click here to access PACW’s Growth, Value, and Momentum ratings.
Bottom Line
PACW’s stock is trading below its 50-day and 200-day moving averages of $13.26 and $22.51, respectively, indicating a downtrend. In order to alleviate investor concerns, the bank said that it had not experienced out-of-the-ordinary deposit flows following the sale of FRB. Moreover, the number of insured deposits has increased, and its liquidity remains strong. It is also looking to sell its lender finance business to free up capital.
Despite these developments, investors’ concerns over the banking system led to PACW’s shares witnessing immense selling pressure. The bank could be forced to sell the entire business, or it may have to raise equity capital from investors, which could lead to the dilution of existing shareholders.
Given its disappointing fundamentals, weak analyst estimates, and poor profitability, the stock could be a good short candidate now.
Stocks to Consider Instead of PacWest Bancorp (PACW)
The odds of PACW outperforming in the weeks and months ahead are significantly compromised. However, there are many financial stocks with impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) stocks from the Financial Services (Enterprise) industry instead:
Jiayin Group Inc. (JFIN)
Forrester Research, Inc. (FORR)
Medallion Financial Corp. (MFIN)
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
PACW shares were trading at $6.14 per share on Monday morning, up $0.38 (+6.60%). Year-to-date, PACW has declined -73.01%, versus a 8.32% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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