PacWest sparks regional-bank rally after unveiling plan to sell loans worth $2.6 billion
By Ciara Linnane
Tone further boosted as Hovde initiates coverage of Zions Bancorp with a buy rating
PacWest Bancorp's stock jumped 21% Monday after the bank announced the sale of a portfolio of 74 real-estate-construction loans with a principal balance of about $2.6 billion as it moves to refocus on its core community-banking business.
The move sparked a broader rally in beaten-down regional-bank stocks, which have been volatile since the March collapse of Silicon Valley Bank and the takeover of First Republic Bank by JPMorgan Chase & Co. in early May.
There was further support for the sector from Hovde Group, which initiated coverage of Zions Bancorp with a bullish outperform rating, the equivalent of buy.
PacWest (PACW) said it is selling the loans to a unit of real-estate-investment company Kennedy Wilson Holdings.
"Kennedy Wilson or its designees will also assume all remaining future funding obligations under the acquired loans of approximately $2.7 billion," PacWest said in a regulatory filing.
The bank has also agreed to sell an additional six real-estate-construction loans with a principal balance of about $363 million to Kennedy Wilson.
The sale of the loans is subject to Kennedy Wilson's satisfactory due diligence. The company will place $20 million into a third-party escrow account that will be refundable.
The deal is expected to close in several tranches in the second and third quarters. "There can be no assurance that the transaction will be completed in part or at all," said the filing.
See also: FDIC set to levy big banks to pay for $15.8 billion bailout of Silicon Valley, Signature Banks
PacWest shares are down 73% in the year to date, caught up in the turmoil created by bank failures. The Los Angeles, Calif.-based bank said it lost 9.5% of its deposits during the week ending May 5 amid market volatility following JPMorgan's (JPM) rescue of First Republic Bank.
See:Here's why people are still worried about regional banks and commercial real estate
Also:Senators grill SVB, Signature Bank CEOs for putting profits ahead of shareholders and depositors in collapse
Meanwhile, Hovde Group said that "misplaced fears" are behind the deeply discounted valuation of Zions and that investors are overlooking its healthy profitability.
"Operationally, [Zions] looks to be firing on all cylinders, and we believe the banking market dislocation offers a very opportunistic entry point in a quality franchise," analyst Ben Gerlinger wrote in a note to clients.
Even with his conservative estimates modeling near-term deposit runoff, slower growth, higher loan-loss provisions and some concerns around office commercial real estate, "we feel very comfortable recommending the stock given the deeply discounted share price," he wrote.
Hovde assigned Zions (ZION) a $40 price target that's about 44% above its current price.
"Fundamentally, we believe the market is incorrectly pricing in a draconiandeposit environment and overlooks the looming rapid capital build; supported by earnings and the short duration bond book," said Gerlinger.
Zion's stock was up 6% in Monday afternoon trading.
Other regional banks were also higher. Western Alliance Bancorp. (WAL) was up 7% and KeyCorp (KEY) was up 3.3%. Comerica Inc. (CMA) rose 3%.
The KBW Bank exchange-traded fund was up 1.4% and the SPDR S&P Regional Banking ETF (KRE) was up 2.7%.
The S&P 500 has gained 9% in the year to date.
-Ciara Linnane
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May 22, 2023 14:09 ET (18:09 GMT)
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