Bank stocks generally moved lower Wednesday as regulators and banking leaders continued bricking up weak spots in the U.S. rampart of small and midsize banks. Financial stocks saw little change after the Federal Reserve's critical decision to hike rates in the afternoon.
Financial shares finished largely higher on Tuesday after Treasury Secretary Janet Yellen declared the banking system sound, and said the government was prepared to provide additional deposit guarantees if needed.
Fed Rate Hike
The Federal Reserve moved to raise the federal funds rate by 25 basis points on Wednesday, putting it in the range of 4.75% to 5%. The increase was in line with market expectations. The sector has been pounded by the Fed's string of rapid rate increases, and any hike was seen as potentially damaging to small and mid-sized banks.
New quarterly projections show Federal Reserve policy committee members expect the key interest rate to end 2023 at 5.1%, implying one more hike. And the Fed sees the benchmark federal funds rate falling to 4.3% by the end of 2024, higher than the 4.1% forecast from December.
But officials hinted they may pause raising interest rates soon. “The committee anticipates that some additional policy firming may be appropriate,” according to the post-meeting policy statement. Previous statements going back to March 2022 mentioned a likelihood of “ongoing increases” in policy rates. But the phrasing was dropped.
Regionals led bank stocks lower following the news. Financial shares saw a slight boost leading up to the announcement.
First Republic Bank Hires Consultants
First Republic Bank (FRC) brought on Lazard (LAZ) and McKinsey as consultants while it explores strategic options. Those include a possible sale, capital infusion or cutting assets, the Wall Street Journal reported late Tuesday. Separately, Reuters reported the bank could downsize if it fails to raise capital. And First Republic may need government backing to secure a deal, Bloomberg reported Tuesday.
Last week, First Republic received a $30 billion rescue deposit from America's 11 largest banks. And JPMorgan (JPM) CEO Jamie Dimon is leading discussions for a new rescue plan. S&P Global downgraded First Republic deeper into junk status Sunday to mark its second downgrade in a week. Moody's and Fitch cut their First Republic ratings into junk last week.
FRC stock fell 15.9% Wednesday after bolting 30% higher Tuesday.
Silicon Valley Bank Former Parent Says FDIC Seized $2 Billion
SVB Financial had its first bankruptcy court hearing on Tuesday after filing for chapter 11 protections on Friday. During the hearing, the former parent firm of the failed Silicon Valley Bank claimed the FDIC improperly blocked access to about $1.9 billion stored in accounts held at Silicon Valley Bridge Bank NA, which is the regulator-controlled successor to Silicon Valley Bank, the WSJ reported.
SVB also alleged the FDIC cut off communications and directed the bridge bank to claw back transfers SVB Financial made to other bank accounts.
On March 16, the FDIC moved the SVB Financial funds into an account it controls while the regulator investigates claims it might bring against SVB, according to bankruptcy statements.
If the FDIC claims against SVB Financial and its assets are successful, it could erode the amount available to pay the company's unsecured bondholders, which are owed about $3.4 billion, the WSJ reported.
Charles Schwab Price Target Slashed
Barclays cut its price target on Charles Schwab (SCHW) stock to $61 from $79 Monday but maintained an Equal Weight rating on the shares. In the wake of SVB Financial and the recent bank turmoil, Barclays believes near-term cash borrowing will weigh on fiscal 2023 and 2024 balance sheet growth for the sector.
Meanwhile, the firm raised its price target on Coinbase (COIN) stock to $86 from $63 Monday as banks face headwinds in the coming fiscal years.
SCHW stock dropped 5.4% Wednesday, while COIN stock crept 8.2% lower.
Los Angeles-based PacWest Bancorp on Monday said it “would not be prudent” to move forward with plans to raise additional capital. PacWest took steps to shore up its liquidity and stabilize deposit levels, including raising capital from potential investors.
PacWest secured a $1.4 billion credit facility via Apollo Global Management (APO)-backed investment firm Atlas SP Partners. The company said the proceedings “unlocked liquidity from unencumbered, high-quality assets in an expeditious manner.”
The bank has borrowed $3.7 billion from the Federal Home Loan Bank, $10.5 billion from the Federal Reserve Discount Window and $2.1 billion from the Bank Term Funding Program as of March 20.
PacWest reported $27.1 billion in deposits as of March 20, down 20% from $33.9 billion at the end of December. As of Monday, PacWest listed $11.4 billion in available cash with $9.5 billion in uninsured deposits. Currently, its FDIC-insured deposits exceed 65% of total deposits.
PacWest's FDIC-insured venture-specific deposits exceed 82% of all venture-specific deposits. The bank has another $600 million in deposits backed by tradable securities. PacWest's spot deposit rate increased to 2.04% as of March 20, from 1.71% as of Dec. 31.
“I am proud of the efforts the entire PacWest team has taken in these challenging times to enhance our liquidity and preserve franchise value,” CEO Paul Taylor said. “As we look ahead, we have continued confidence in the strength of PacWest and are encouraged by the stability we have seen in our deposits and liquidity over the past week.”
Government and regulatory messaging, including Secretary Yellen's comments about protecting smaller bank depositors have also been encouraging, Taylor said.
PACW stock fell roughly 17% Wednesday following the news, nearly erasing its 18.8% gains from Tuesday.
The Next Banking Nightmare?
During and after the Great Financial Crisis of 2008, 485 U.S. banks went under.
We warned about 484 – an accuracy rate of 99.8%
Now, I have a new warning.
But this time, it's not just about a few hundred banks.
It's about nearly every single bank in America, whether large or small.
A veritable banking nightmare!
Originally published on Investors.com