Late last week, PacWest Bancorp (Nasdaq: PACW) suffered a sharp loss in market value when the Securities Depository showed that deposits fell by 9.5% during the week of May 5th. Of course, lackluster deposits are indicative of low confidence. However, the real headwind for the regional bank may be a loss of credibility among its shareholders. Therefore, I am bearish on PACW stock.
to be fair, CNBC reported that PacWest blamed the media for the majority of the outflows. Specifically, the news that the lender was exploring strategic options spooked the bank’s customers. Furthermore, PacWest stated that it funded these raffles with available liquidity. Right now, the company has $15 billion in cash available against $5.2 billion in uninsured deposits.
Investors are still reading between the lines. In the past week, PACW stock has fallen more than 21%. Even worse, more pain is very likely heading to PacWest. After all, the influx of deposits is only one (albeit significant) component of this unsightly mess.
PACW stock has earned credibility among shareholders
When the first of two regional bank failures materialized this year, depositors who were unlucky enough not to withdraw soon had the same question: what would happen to their money? According to the FDIC, “The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per property class.”
Quickly, the federal government responded by promising that depositors’ money would be safe. However, the problem has always been the shareholders. The government has clearly stated that it will not protect shareholders. Therefore, anyone who decides to invest in stocks of PACW or its beleaguered ilk risks losing everything.
Now, to be sure, holders of common stock stand last in the liquidation proceedings. Every person entering the capital markets should understand this point. However, most securities do not evaporate overnight. Usually, an increasing number of warning signs appear before the end arrives.
However, with the regional banks ailing, the end could come in the blink of an eye. As TipRanks reporter Shrilekha Pethe points out, regional bank stocks have experienced cryptocurrency-like swings. Part of the appeal of cryptocurrencies is that they can skyrocket very quickly for no reason. However, they can also go to zero for the same thing.
Effectively, then, shareholders have little reason to hold PACW shares. If the primary bank collapsed, no government agency would fight for their rights.
Uncle Sam can’t hold out on the line indefinitely
Another factor confirming concerns about PACW stocks is that the federal government has limited withdrawal tools. Sure, standing up to your first two bank failures quickly might be the right move. However, with the failure of a third regional bank – along with the possibility of future failures – even depositors will have to worry.
Look at it this way: If all it takes to solve the current banking crisis is for government entities to continue supporting depositors, they will do just that. Unfortunately, Uncle Sam lives in the same paradigm of limited resources, just like everyone else. While the scale may be exponentially greater, at some point, government intervention will lose its potency.
Again, this circumstance discourages investors from holding on to PACW shares, hence the sharp losses.
Financial statements don’t necessarily help
In fairness, PacWest delivered adjusted earnings per share of 66 cents for the first quarter of 2023, beating analysts’ target of 65 cents. However, the latest tally represents a low point compared to adjusted earnings per share of $1.01 in the year-ago quarter.
On the top line, PacWest reported revenue of $315.66 million, which missed analysts’ target by 1.4%. Additionally, it represented an unfavorable comparison to the year-ago quarter, when PacWest generated $329.54 million in sales.
In other words, even in the financial arena, PACW stock presents a credibility challenge.
Is PACW Stock a Buy, According to Analysts?
Turning to Wall Street, PACW stock has a Hold consensus rating of two Buy, six Hold, and zero sell ratings. PACW has an average share price of $17.17, which means an upside potential of 275.7%.
Conclusion: PACW stock offers little cause for hope
While the loss of deposits grabbed most of the headlines at PacWest, the real culprit could be credibility problems among shareholders. It is now clear to anyone with PACW shares or similar investments that the government will not bail them out. Only depositors will be protected and even that could be a problem if these failures continue to rise.
disclosure
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