Shares of mid-sized U.S. lenders edged higher on Wednesday after two straight days of losses underpinned by investor anxiety over whether the collapse of First Republic Bank (FRC.N) could spell more trouble for other regional banks.
PacWest Bancorp (PACW.O) shares rose 6.5% in early afternoon trading after tumbling 28% to close at their lowest level on record on Tuesday.
Western Alliance Bank (WAL.N) advanced 4.2%, while Comerica (CMA.N) and Valley National Bankcorp (VLY.O) added nearly 1% and more than 2%, respectively. The KBW Regional Banking Index (.KRX) rose 2% after closing at its lowest level since December 2020 on Tuesday.
The plunge in regional bank stocks came after U.S. regulators seized First Republic Bank and sold off its assets to JPMorgan Chase & Co (JPM.N) for $10.6 billion.
The bank selloff indicates investor unease over their outlook following the First Republic deal, Brown Brothers Harriman analysts wrote in a note.
“Because that outlook is still unknown, markets did what they always do in these situations and assumed the worst,” the analysts said.
The exposure of regional banks to the commercial real estate sector, particularly office buildings, has also sparked investor worries, given rising interest rates.
Evercore ISI analysts lowered their 2023 earnings outlook for regional lenders and now forecast a nearly 1% decline from a year earlier, compared to already lowered expectations of 4% growth.
The U.S. Federal Reserve, in addition to commenting on the recent bank failures, is expected to announce a 25 basis-point interest rate hike following a meeting of its Federal Open Markets Committee meeting on Wednesday.
“Persistent financial market turmoil, following the collapse and buyout of First Republic Bank earlier this week, has ramped-up bets that this hike will be followed by a pause,” B.Reily chief market strategist Art Hogan wrote in a note to investors.
Hogan added that tighter lending conditions and signs that the economy is stalling suggest inflation will cool more meaningfully in the coming months.