PacWest, Western Alliance stocks rally as Hovde Group calls 'near bottom' in sector after potential 'market manipulation'

By Steve Gelsi

Some potential beneficiaries of a market bottom in bank stocks would be Western Alliance and Home BancShares, Hovde says

Regional bank stocks on Friday recovered all or most of their bruising losses from the previous session, as analysts from Hovde Group and JPMorgan Chase & Co. provided support for the sector that's been quickly losing ground in recent weeks.

PacWest Bancorp (PACW) led the snap-back in regional banks with a whopping 81.7% rise at the closing bell. The stock was halted multiple times for volatility during the session as it surpassed its previous record gain on a closing basis of 33.9% on March 14, 2023.

On Thursday, the stock had closed at a record low of $3.17, after plunging 71.4% amid a six-day losing streak, its longest losing streak since the six-days ended March 13, 2023, as the regional banking crisis began, and the worst six-day performance since the stock went public in 2000.

Hovde Group analysts said Friday that bank stocks offered a "rare entry point" as they called a potential bottom to the steep selloffs in the sector amid speculation about further bank failures despite updates from regional banks on deposit strength.

"There is nothing new fundamentally occurring with bank system deposits (other than the already known movement from lower cost sources)," the Hovde analysts said, adding, "We believe investors could be handsomely rewarded."

Some potential beneficiaries of a market bottom in bank stocks would be Western Alliance Bancorp. and the "solid safe haven" Home BancShares Inc., Hovde said.

Also read:Bank stocks' volatility draws scrutiny for potential market manipulation: report

The prediction of a market bottom is coming true at the moment, as bank stocks rebounded as a stronger-than-expected April job report suggested a soft landing on the economy

Meanwhile, data released late Thursday by the U.S. Federal Reserve showed that bank borrowing in the past week dropped due to the distressed sale of First Republic Bank to JPMorgan Chase & Co., in a move seen as a sign of stability in the banking system

Western Alliance (WAL) rose 42.9%, bouncing back from a 38.5% drop in the previous session.

Zions Bancorp (ZION) rose 19.2%, Metropolitan Bank Holding Corp. (MCB) jumped 16.2% and Home Bancshares (HOMB) rose 1%. Comerica Inc. (CMA) rose 16.8%.

The KBW Nasdaq Bank Index rose 4.6%, the SPDR S&P Regional Banking ETF (KRE) rose 6.3% and the Financial Select SPDR Fund (XLF) moved up by 2.5%.

"Calling market bottoms for banks in severe downdrafts is hard, particularly when conspiracy theorists could fairly point to a lack of action from the Fed, regulators, Washington, and the Treasury to aid the banking system while contagion continues to churn in the financial markets," Hovde analyst Brett Rabatin said.

The question over whether market manipulation is taking place was a fair one, he said.

"Market participants [are] being aggressive with options to lower stock prices and question publicly whether certain banks are experiencing deposit runs or are 'next,'" he said.

Bank failures may also be part of the Fed's toolbox to lower inflation in time and cool off interest rates closer to the 2024 election, as another speculative factor in the market for bank stocks, Rabatin said.

One potential solution for artificial control of bank stock prices would be for the Federal Deposit Insurance Corp. to "support banks by giving unlimited short-term deposit insurance with possible market manipulation occurring in stocks," he said.

Meanwhile, JPMorgan Chase analyst Steven Alexopoulos upgraded Western Alliance Bancorp and Comerica to overweight from neutral and boosted the bank's rating on Zions by two notches to overweight from underweight.

"We believe a sell-off in regional banks has become a catalyst itself to causefurther fear and selling pressure," said Alexopoulos, who said the three stocks have been mispriced.

"With sentiment this negative, in our view it won't take much to see a significantintermediate-term favorable re-rating of regional bank stocks," he said. "Meantime, we see the favorable updates coming from select banks (such as WAL) that deposit balances have remained stable (or increased) helping to counterbalance very negative sentiment."

Tomi Kilgore contributed to this report

Also read: Bank stocks drop again as PacWest free fall 'feeds that narrative' of weakness despite a 'fundamentally sound' business

-Steve Gelsi

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05-05-23 1633ET

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