ReportWire

Tag: Commercial Banking

  • Stocks are trapped in a trading range. Something’s got to give.

    Stocks are trapped in a trading range. Something’s got to give.

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    The U.S. stock market, as measured by the S&P 500 Index SPX, is trapped in a trading range, and volatility seems to be damping down considerably. The significant edges of the trading range are support at 4330 and resistance at 4540. Both of those levels were touched in the latter half of August. A breakout from this range should give the market some strong directional momentum. 

    Since Labor Day, prices have hunkered down into an even narrower range. Typically, the latter half of September through the early part of October…

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  • Citizens to debut digital assistant | Bank Automation News

    Citizens to debut digital assistant | Bank Automation News

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    NEW YORK — Citizens Bank will launch a virtual assistant, Digital Butler, on its commercial banking app in the next quarter, Jo Wyper, executive vice president of commercial digital operations at Citizens Bank, told Bank Automation News at Finovate Fall 2023.  The $222 billion bank’s Digital Butler launched in February but was only available on […]

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    Vaidik Trivedi

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  • With the economy holding up, why is the market still so down on America’s banks?

    With the economy holding up, why is the market still so down on America’s banks?

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    Regional banking stocks are on pace for their worst year back to 2006, with the long tail of the SVB collapse. But bank stocks had been in rally mode since May, when First Republic was seized by the government and sold to JPMorgan, until bond rating agencies began issuing August warnings and downgrades.

    Bloomberg | Bloomberg | Getty Images

    Just how bad off are America’s banks, really?

    Bond rating agencies trash-talked banks all through August, helping drive a near-6% drop in the S&P 500 during the month. But Wall Street equity analysts who cover banks argue that their counterparts on the bond side of the research profession, at Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, got it wrong. They point to a period of rising bank stock prices before the bond ratings calls and better-than-expected earnings reports as evidence that things are better than the agencies think.

    While the regional banking sector as tracked by the SPDR S&P Regional Banking Index is down nearly 25% year to date, according to Morningstar — and on pace for the worst year on record back to its inception in 2006, with the long tail of the SVB collapse hard to claw back gains from — bank stocks had been in rally mode from May to July. Regional bank stocks, in particular, gained as much as 35% before the bond warnings and downgrades began. Meanwhile, second-quarter bank earnings beat forecasts by 5%, according to Morgan Stanley.  

    The higher interest rates bond analysts cited hurt profits some, but most banks’ net interest income and margins were higher than a year before. Delinquencies on commercial real estate loans rose, but stayed well below 1% of loans at most institutions, with some of the banks singled out by bond rating agencies reporting no delinquencies at all. The ratings actions pushed the regional bank stock index 10% lower for the month-long period ending Sept. 8, according to Morningstar (the Moody’s bank warning was issued August 7).  

    At stake is not only what bank stocks may do next, but whether banks will be able to fill their role in providing credit to the rest of the economy, said Jill Cetina, associate managing director for U.S. banks at Moody’s. Their medium-term fate will have a lot to do with outside forces, from whether the Federal Reserve cuts interest rates next year to how fast the return-to-work push from employers in recent months gains momentum. Looming over all of this is the question of whether there will be a recession by early 2024 that worsens credit problems and cuts banks’ asset values, as Moody’s Investors Service expects.

    “It’s reasonable to ask, is there a credit contraction in the banking sector?” Cetina said. She pointed to Federal Reserve surveys of bank lending officers that look like pre-recession measures in 2007 and 2000, with many banks raising credit prices and tightening lending standards. “Banks play a key role in shaping macroeconomic outcomes,” she said.

    By any reckoning, the argument about banks is about two things: Interest rates and real estate, specifically office buildings. (Banks also call warehouses and apartment complexes commercial real estate, but their vacancy rates are not historically high). The arguments depend on two assumptions that markets believe less than they did earlier this year.

    The bear case relies heavily on the prospect of a recession, which stock investors and economists think is much less likely than many believed six months ago. Goldman Sachs chief economist Jan Hatzius cut the firm’s estimated U.S. recession odds to 15% on Sept. 4, meaning the bank sees only a baseline risk of a downturn. At Moody’s, while the bond-rating arm expects a U.S. recession next year, the company’s economic consulting unit Moody’s Analytics doesn’t.

    It also turns on an assumption of sustained high interest rates. While debate continues and the Fed’s own commentary continues to express a willingness to raise rates more, many investors now think the Fed will begin to trim the Fed funds rate by spring as inflation fades, according to CME Fedwatch. And while experts such as RXR Realty CEO Scott Rechler and billionaire real estate investor Jeff Greene believe office vacancies will stay high enough to force defaults by more developers, even as employers gain the upper hand against workers who want to continue to work from home, that didn’t show up in second–quarter bank earnings.

    “I don’t necessarily think what they said is not true– it’s just less true than in May,” said CFRA Research bank stock analyst Alexander Yokum. “Expectations have improved over the last few months.” 

    March’s bank failures were about interest rates. The rise in rates since the Fed’s first post-Covid boost to the Fed funds rate in March 2022 had left banks with trillions of dollars of bonds written at lower rates before last year, whose value fell as rates rose. That opened precarious holes in the balance sheets of some banks, and fatal ones for banks that failed. Coupled with commercial real estate, higher funding costs create “layers” of risk going forward, Cetina said. “They’re both a problem, and they are happening at the same time,” she said.

    The Fed stepped in with a short-term solution for banks’ funding issues, extending more than $100 billion in financing under a program called the Bank Term Funding Program, designed to help banks close the gap between the book value of their securities, mostly U.S. Treasuries, and their market value in a new, higher interest-rate market. That lets banks act as if their capital is not impaired, when it is, said veteran analyst and Fed critic Dick Bove of Odeon Capital.

    “If the capital is not there, the bank can’t put more money out there” in loans, Bove said. “People say they understand that, but they don’t.” 

    Interest rate effects on bank profits

    The jump in rates threatens the net interest income that is the source of bank profits and their long-term lending capacity, the bond rating agencies said. Indeed, interest income fell at most banks in the second quarter – compared to the first quarter – and Yokum says it will fall more in the third quarter. So did net interest margin –  the difference between the rates banks pay for funds, usually deposits, and what they collect on loans and other assets. 

    But the drops were small enough that banks made up the lost income elsewhere. The average regional bank stock rose 8% after earnings, Morgan Stanley said, with banks beating profit forecasts by an average of 5%. Most banks reported before the bond agencies acted.

    Moody's downgrade of U.S. banks ‘surprising,’ says top banking analyst Gerard Cassidy

    Bulls point out that while interest rates began to bite at bank profits in the second quarter, the impact so far has been minor for most, and several banks said that higher interest rates have boosted profits over the past year. At most banks, both net interest income and net interest margins did better in the second quarter than in the second quarter of 2022, making rising rates helpful to bank profits overall. Morgan Stanley analysts Manan Gosalia and Betsy Graseck said most banks, even regional banks thought to be most vulnerable to depositors fleeing as rates rise, also added deposits in the quarter. That stems fears they would boost rates sharply to keep customers. 

    Not all banks felt much pressure on deposit rates: Wells Fargo said its average was 1.13% in the second quarter; at Bank of America it was just 1.24%. 

    Credit quality is on the decline

    Credit quality is getting a little worse, but still better than pre-pandemic levels at most institutions, Yokum said. Even the office sector still is showing few signs of serious problems. Moody’s calls banks’ current credit quality “solid but unsustainable.”

    Take Valley National Bancorp, a New Jersey institution whose rating S&P cut in mid-August. Or Commerce Bancshares, cut by Moody’s. Or Zions Bancorporation, a target of low ratings from both stock and bond analysts.

    Valley has $50 billion in loans on its balance sheet, and $27.8 billion of them are in commercial real estate, according to the bank, a much higher proportion than the 7% at Bank of America. But only 10% of Valley’s commercial real estate loans, less than 6% of its total loans, are to office buildings. 

    Valley has had stumbles in office lending, to be sure. It disclosed that its total non-performing assets were $256 million at the end of June. But that remains only about half of 1% of its total loan book. Chargeoffs of loans the bank thinks won’t be fully repaid fell in the quarter, and the company’s $460 million in loan loss reserves is nearly double the amount of all its troubled loans. 

    Similarly, Zions’ $2 billion office portfolio, part of a commercial real estate exposure that is more than a quarter of the bank’s assets, doesn’t have a single delinquent loan, according to the bank’s second-quarter report. Neither did Commerce.

    “Zions’ chargeoffs were .09 of 1% of total assets,” said Yokum, who doesn’t follow Commerce or Valley. “Not alarming.” 

    Many banks argue that bears overstate real-estate lending problems by overlooking how few of their real estate loans are to office buildings. With hotel and warehouse occupancy high, they’re selling the idea that only their office portfolio is at serious risk, and that the office loans are too small to threaten banks’ health. At KeyCorp, whose shares have dropped 36% this year and which S&P downgraded, office loans are 0.8% of the bank’s total.

    Bank delinquencies rose in the last quarter, but remain lower than a year ago.

    “We have limited office exposure with … almost no delinquencies,” Fifth Third Bancorp chief financial officer James Leonard said on the bank’s earnings call. “We continue to watch office closely and believe the overall impact on Fifth Third will be limited.”

    Two big questions about banks finding a bottom

    There are two big unanswered questions about banks and real estate. Eight months into a year where nearly a quarter of office building mortgages are expected to mature and need refinancing at today’s higher rates, chargeoffs — while getting more common — are still less than 1% of loans at nearly every major bank. Is a surge coming, or are banks delaying a reckoning with short-term financing, hoping for rates to fall or occupancy to rise? 

    And, when will more workers go back to the office, relieving pressure on companies to stop paying for space they don’t really use?

    The share of U.S. workers working from home at least part of the week has stabilized at around 20-25%, below its peak of 47% in 2021 but well above the pre-pandemic 2.6%, Goldman’s Hatzius wrote in an Aug. 28 report. With CEOs as prominent as Amazon’s Andy Jassy becoming more forceful about return to office, Goldman says online job postings are down to only 15% of new positions allowing work from home. Even Zoom Communications, maker of video-conferencing software, is making staffers return to the office two days a week. Hatzius estimates remaining part-time WFH will add 3 percentage points to office building vacancy rates by 2030. But that impact will be lessened by a near-halting in new construction, he wrote.

    Findings like these have some market players speculating that a bottom may be near. 

    Manhattan real estate attorney Trevor Adler says he’s seeing an uptick, with public sector tenants like Empire State Development signing long-term leases. ESD took 117,000 square feet in Midtown in July, he said. 

    “To have that kind of deal in July is not typical,” said Adler, a partner at Stroock & Stroock & Lavan. “That work is keeping me busy, educational, hospital and charity.”

    Others argue that the slow rate of foreclosures is normal early in what they believe is a long-term crisis. 

    “Crises happen slowly, then all at once,” said Ben Miller, CEO of Washington-based Fundrise, an online platform for real estate investment, pointing out that several years elapsed between early warnings and the depth of the late-2000s home mortgage crisis.  

    Banks have been encouraged by the Fed and other bank regulators to give previously-solvent borrowers extensions or other workouts, Miller said. Regulators argue that this guidance, released in June, simply restated previous policy.

    The primary way the Fed can defuse upcoming foreclosures is to lower rates, so developers can refinance office buildings and stay profitable, Miller said. 

    “If we end up higher for longer, the banks have a huge problem,” Miller said. “If high rates are transitory, it gets the bank to a normalized rate environment and there’s no problem.”

    Officials at the Fed declined comment. 

    The takeaway may be that banks’ problems are big enough to contain earnings for a few quarters, while not threatening their solvency, Yokum said. At Standard & Poor’s, analysts emphasized that 90% of U.S. banks have stable outlooks, even as it downgraded five banks. “Stability in the U.S. banking sector has improved significantly in recent months,” analysts led by Brendan Browne wrote.

    “I do expect net interest margins to fall in the third quarter, and for credit quality to get worse, but I expect them both to be manageable,” Yokum said. “And both are well built into the stock prices.”

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  • This hadn’t happened on the U.S. Treasury market in 250 years. Now it’s about to.

    This hadn’t happened on the U.S. Treasury market in 250 years. Now it’s about to.

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    The 10-year Treasury bond is on track for a third year of losses in 2023, something that hasn’t happened in 250 years of U.S. history.

    In short, it has never happened, say strategists at Bank of America.

    The return for investors putting money in that bond
    BX:TMUBMUSD10Y
    stands at negative 0.3% so far in 2023, after a 17% slump in 2022 and a 3.9% drop in 2021, the bank’s strategists, led by Michael Hartnett, pointed out in a note on Friday.

    Here’s a visual on that:

    That reflects a “staggering 40% jump in U.S. nominal GDP growth” — factoring in growth and inflation — “since the COVID lows of 2020,” they said, providing this chart:

    Bond returns have suffered this year as the Federal Reserve has continued its interest-rate-hiking campaign aimed at getting inflation under control. The “big picture in the 2020s vs. the 2010s is lower stock and bond returns, which we would expect to continue given political, geopolitical, social [and] economic trends,” said Hartnett and the team.

    This year has been better for stocks
    DJIA

    SPX,
    but the bounce since COVID pandemic restrictions began to be lifted has been very concentrated in U.S. stocks, especially the technology sector, with breadth in global markets “breathtakingly bad,” the analysts said. Breadth refers to the number of stocks actively participating in a rally.

    Breadth is the worst since 2003 for the MSCI ACWI, which captures large- and midcap-stock representation across 23 developed markets and 24 emerging ones.

    As for the latest weekly flows into funds, Bank of America reported that $10.3 billion went to stocks, $6.5 billion to cash and $1.7 billion to bonds, with $300 million draining from gold
    GC00,
    -0.06%    .

    The yield on the 10-year Treasury was holding steady on Friday at 4.102% after data showed the U.S. economy generated 187,000 jobs in August, but the unemployment rate rose to 3.8% from 3.5%, and job gains were revised lower for July and June.

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  • This hadn’t happened on the U.S. Treasury market in 250 years. Now it’s about to.

    This hadn’t happened on the U.S. Treasury market in 250 years. Now it’s about to.

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    The 10-year Treasury bond is on track for a third year of losses in 2023, something that hasn’t happened in 250 years of U.S. history.

    In short, it has never happened, say strategists at Bank of America.

    The return for investors putting money in that bond
    BX:TMUBMUSD10Y
    stands at negative 0.3% so far in 2023, after a 17% slump in 2022 and a 3.9% drop in 2021, the bank’s strategists, led by Michael Hartnett, pointed out in a note on Friday.

    Here’s a visual on that:

    That reflects a “staggering 40% jump in U.S. nominal GDP growth” — factoring in growth and inflation — “since the COVID lows of 2020,” they said, providing this chart:

    Bond returns have suffered this year as the Federal Reserve has continued its interest-rate-hiking campaign aimed at getting inflation under control. The “big picture in the 2020s vs. the 2010s is lower stock and bond returns, which we would expect to continue given political, geopolitical, social [and] economic trends,” said Hartnett and the team.

    This year has been better for stocks
    DJIA

    SPX,
    but the bounce since COVID pandemic restrictions began to be lifted has been very concentrated in U.S. stocks, especially the technology sector, with breadth in global markets “breathtakingly bad,” the analysts said. Breadth refers to the number of stocks actively participating in a rally.

    Breadth is the worst since 2003 for the MSCI ACWI, which captures large- and midcap-stock representation across 23 developed markets and 24 emerging ones.

    As for the latest weekly flows into funds, Bank of America reported that $10.3 billion went to stocks, $6.5 billion to cash and $1.7 billion to bonds, with $300 million draining from gold
    GC00,
    +0.02%    .

    The yield on the 10-year Treasury was holding steady on Friday at 4.102% after data showed the U.S. economy generated 187,000 jobs in August, but the unemployment rate rose to 3.8% from 3.5%, and job gains were revised lower for July and June.

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  • CIBC expects its pullback in office lending will slow down U.S. growth

    CIBC expects its pullback in office lending will slow down U.S. growth

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    By the end of the year, CIBC will have reviewed its entire U.S. office loan portfolio, Chief Risk Officer Frank Guse says. “We are doing so on a very, very granular and very intense basis,” he says.

    Della Rollins/Bloomberg

    The Canadian bank CIBC is deemphasizing U.S. office lending amid sluggish return-to-office trends and rising loss provisions.

    Because of the pullback in office loans, executives at the Toronto-based company said they expect slower U.S. growth than the bank has enjoyed in recent years. CIBC is projecting mid-single-digit loan growth in its U.S. business, driven primarily by commercial and industrial loans and the wealth management segment.

    CIBC reported Thursday that its allowance coverage ratio for U.S. office loans nearly doubled from 4.1% in the previous quarter to 7.6% during the three-month period that ended July 31. CIBC has relatively large concentrations of office loans in the Chicago, Boston, Washington, D.C., and Miami metropolitan areas.

    By the end of the year, the bank will have reviewed its entire U.S. office loan portfolio, Chief Risk Officer Frank Guse said Thursday. “We are doing so on a very, very granular and very intense basis, and we have a dedicated team doing that,” he said during the company’s quarterly earnings call.

    “Overall, our credit portfolio is performing very well in the U.S., so it is isolated to the office sector,” Guse said.

    CIBC, which acquired Chicago-based Private Bancorp for $5 billion in 2017, has been focusing on growth in the U.S. market in recent years. Immediately after buying Private Bancorp, CIBC’s American operations accounted for a tenth of its profits, but CEO Victor Dodig said that he wanted to boost that share to 25%.

    By the fourth quarter of last year, CIBC’s U.S. operations accounted for 20% of the company’s net income. That number was 15% in the most recent quarter, as the rising loss provision eroded U.S. profits.

    Office loans have been an area of concern across the U.S. banking sector in recent quarters as the pandemic-era rise of remote work has shown staying power, hurting property values. Wells Fargo and JPMorgan Chase were among the banks that increased their office-loan reserves last quarter.

    At CIBC, which is one of Canada’s big six banks, executives noted Thursday that U.S. office loans represent less than 1% of the company’s total loan portfolio. Similarly, the net charge-off ratio on U.S. office loans is currently less than 1%.

    “We expect to see losses in and around the current level for the portfolio for the next few quarters,” Guse said.

    Still, as a result of the pullback in office loans, the commercial real estate segment will become a smaller percentage of CIBC’s total U.S. business, according to Shawn Beber, CIBC’s group head for the U.S. region.

    Mario Mendonca, an analyst at TD Securities, asked CIBC executives if deemphasizing U.S. office loans would lead to slower growth in the U.S., and Beber responded that it will.

    “Part of that is environment,” Beber explained, “and part of that is going to be strategic choices.”

    During the most recent quarter, CIBC’s U.S. commercial banking and wealth management segment reported net income of $55 million USD, which was down 64% from the same period a year earlier. The bank attributed the decline primarily to the higher provision for credit losses, lower fee income and higher employee-related costs, though those factors were partially offset by a bigger net interest margin and loan volume growth.

    CIBC’s capital markets unit, which includes some U.S. operations, reported an 11% increase in net income, as higher revenue more than outweighed an increase in noninterest expenses.

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    Kevin Wack

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  • The ABCs of how inflation hurts bank profits

    The ABCs of how inflation hurts bank profits

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    Banks’ aggregate cost of deposits rose to 1.78% in the second quarter, up 37 basis points from the prior quarter and more than offsetting the impact of higher rates on loan yields, according to S&P Global Market Intelligence.

    torwaiphoto – stock.adobe.com

    Inflation reached a 40-year high in 2022, topping 9% in the aftermath of the pandemic and the supply chain snarls it created. This set in motion a range of unique challenges for banks — from rising deposit costs to weaker loan growth to fresh threats to credit quality.

    Prices have since been largely tamed — the Consumer Price Index increased at a relatively modest 3.2% rate in July — but this was due to aggressive interest rate hikes that have weighed on banks’ profitability in 2023.

    The Federal Reserve has boosted rates 11 times since March 2022, driving borrowing costs higher, curbing consumer spending and helping to curtail overall prices. However, the Fed’s actions also pushed up the interest rates that banks pay for deposits. When this happens, the margin between what banks pay for deposits and earn on loans — known as net interest margin — contracts. Shrinking margins tend to hurt banks’ bottom lines because most of them rely heavily on the income they earn from lending.

    The median NIM for the U.S. banking industry fell to 3.40% in the second quarter, down 5 basis points from the prior quarter and down 20 basis points from the start of the year, according to S&P Global Market Intelligence data. The firm said banks’ aggregate cost of deposits rose to 1.78% in the second quarter, up 37 basis points from the prior quarter and more than offsetting the impact of higher rates on loan yields. 

    “No question in a high-rate environment, the pressure on margins becomes a challenge,” said Robert Bolton, president of bank investor Iron Bay Capital.

    When NIMs dwindle, banks tend to scale back lending. They do this to reduce their need for high-cost deposits to fund loans and to minimize exposure to sectors vulnerable to an economic downturn. Historically, when spiking rates combine with inflation, the U.S. economy goes into a downturn. When lending slows, so does banks’ collective revenue.

    For example, Optimum Bank in Fort Lauderdale, Florida, is methodically easing back on lending this year after strong growth in 2022. It still expects to expand this year, but investors should expect a noticeably slower pace, Moishe Gubin, chairman of the $622 million-asset bank, told shareholders in a second-quarter letter.

    “I, for one, am in favor of slowing growth during this strange time in the world with interest rates being as high as they are,” Gubin said.

    As Gubin suggested, lenders also grow more selective to avoid recession fallout — namely, souring loans and the losses that accompany them. In the current market, bankers are concerned about commercial real estate broadly and urban office properties in particular, given enduring remote-work trends and high vacancy rates.

    With recession concerns, an increasing number of lenders boosted reserves for potential future loan losses during the first half of 2023. 

    Several community banks that cater to local businesses also said during second-quarter earnings season they were closely monitoring those customers’ ability to absorb both higher expenses imposed by inflation and increased borrowing costs.

    Citizens Financial Group said its index of national business conditions worsened in the second quarter. It dipped to 48.5 from 53.9 the prior quarter. A reading below 50 indicates weakness.

    Eric Merlis, managing director at Citizens, said that while the overall labor market remained strong in the second quarter, new business applications decreased in most states and manufacturing activity slowed. The Citizens index results show “a business environment where activity has slowed as interest rate hikes seem to be working to curb inflation,” Merlis said.

    Bankers also are tempering fee-income expectations because of anticipated pullbacks in consumer spending and card use — on top of an already sharp drop in residential mortgage demand after interest rates spiked. Banks earn fees on home loan originations.

    Against that backdrop, many banks are looking for ways to become more efficient to offset high deposit costs and falling revenue should lending recede in an economic downturn. Several have closed branches and laid off staff this year.

    “I do think you see some urgency to rein in expenses,” said Michael Jamesson, a principal at the bank consulting firm Jamesson Associates.

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    Jim Dobbs

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  • Key’s profits have sunk. Can it move fast enough to soothe investors?

    Key’s profits have sunk. Can it move fast enough to soothe investors?

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    KeyCorp is struggling to regain investors’ confidence, as the Cleveland-based lender underperforms other regional banks, its profits drop and the size of its dividend comes into question.

    The company’s stock is down 38% this year, a larger drop than other regional banks its size, including Ohio-based competitors Fifth Third Bancorp and Huntington Bancshares. The ratings agency S&P Global downgraded KeyCorp last week, citing its “constrained profitability” compared with other banks its size.

    The $195 billion-asset bank’s troubles center around the rapid rise in interest rates over the past year. A sizable chunk of Key’s assets are tied up in securities that the company bought when interest rates were lower — saddling it with lower-yielding assets for several more months and limiting its interest-related revenues.

    Key’s interest expenses are climbing, too. The bank is paying more for its deposits — part of the industrywide competition to retain depositors by offering higher interest rates. Higher-cost borrowings that Key assumed this year in larger volumes than its peers are also weighing on the company.

    As a result, Key’s guidance on its net interest income — what it earns in interest minus what it pays in interest — has proven to be a disappointment.

    “It’s been a very tough year for them,” said Gerard Cassidy, an analyst at RBC Capital Markets, adding that Key’s balance sheet “was not set up for this kind of rate environment.”

    KeyBank’s parent company projects that its net interest income will drop 12% to 14% this year — a sharp swing from its projection in April of a 1% to 3% drop, and from earlier forecasts that net interest income would rise. Its noninterest income has also slumped, partly due to a decline in investment banking activity. Overall, Key’s quarterly profits haven’t been this low in years, except for a couple of quarters at the start of the pandemic in 2020.

    There is a light at the end of the tunnel, but it may take at least a year to get there. As some of Key’s lower-yielding assets expire, cash will be freed up, and the company should be able to reinvest those funds at higher interest rates.

    Key executives have pointed to that coming shift as a factor that will benefit the company — to the tune of $900 million annualized by the first quarter of 2025.

    That number is “not immaterial,” Cassidy said. But it’s “tough for shareholders to be patient considering the stock has suffered so much this year,” he added.

    Some analysts are particularly pessimistic about Key’s prospects. Alexander Yokum, an analyst at CFRA Research, downgraded the company from a “sell” rating to a “strong sell.”

    Key offers a healthy dividend to investors, but Yokum wrote that the dividend is “at risk of getting cut” as the bank prioritizes building up its capital to comply with still-pending rules from the Federal Reserve.

    As Key’s profits fall, the amount of earnings going toward its dividend has risen sharply. The dividend payout ratio has “ballooned” to 76%, far higher than the 42% figure at its peers, Yokum wrote.

    In a statement, Key said that it’s well capitalized and on strong footing — thanks to a moderate risk profile, a wide range of funding sources and “a diversified deposit base built on earned and enduring trust from our clients.”

    “We are a nearly 200-year-old financial institution with safe, sound and strong fundamentals,” the company said. “KeyBank is well positioned to continue supporting all our clients with a full range of financing options while maintaining our moderate risk profile and delivering value to our shareholders.”

    Asked last month about a potential dividend cut, KeyCorp CEO Chris Gorman said that he was “confident” the company could sustain the payouts. The company is clearly “under-earning” thanks to its balance sheet positioning, Gorman told analysts at the time.

    But Key is also building capital and paring down its balance sheet, and executives expect the current difficulties with respect to net interest income to reverse themselves in the next couple of years, Gorman said. 

    Plus, Key’s loan book remains healthy, according to Gorman, who said that it should perform well even if a recession hits.

    Analysts agree that credit quality is a major bright spot for Key, which in the years after the 2008 financial crisis cut back on risk-taking in its loan portfolio.

    Key’s sharper focus on credit risk has led to reduced exposure to the office sector — a segment that’s drawn concern from investors as sluggish return-to-office trends spark worries that urban office loans will deteriorate.

    Less than 1% of Key’s loans are office-related. At Key’s peers, that figure is a median of 3%, the company noted in an investor presentation.

    Key’s credit quality “remains excellent, and its exposure to higher-risk loan categories is low,” S&P wrote in its report downgrading the bank. The ratings firm also pointed to Key’s “diversified deposit base” as a source of stability.

    But S&P also noted that higher interest rates “will continue to pressure profitability for longer and to a greater degree at Key” than at its peer banks.

    One reason that Key is in this predicament: its investment and hedging strategies. When interest rates were lower, the bank deployed some of its spare cash on securities.

    Those securities are paying some interest, but far less than they would have if Key had either bought them at today’s rates or stuck its cash at the Fed. The central bank now pays upwards of 5.25% for the cash banks that place there — a far higher rate than the 1.74% yield that KeyCorp is earning on its available-for-sale securities.

    The securities aren’t ultra-long term, so they’re starting to roll off Key’s balance sheet and opening the door for the bank to reinvest its money at higher rates. Interest rate swaps that Key bought to protect itself against changes in rates are also expiring over the next two years, which will provide yet another boost.

    When Key reaches those inflection points, the company should look stronger than its peers, said Scott Siefers, an analyst at Piper Sandler. Right now, Key’s biggest challenge is convincing investors that its net interest income is “indeed finding a bottom and will regain momentum,” Siefers said.

    “They’ll make it through, but this is not a thing where they wake up Monday or Tuesday and this is resolved,” Siefers said.

    The bank’s securities portfolio has also soured investors for another reason — the “unrealized” losses that accumulated as its low-yielding securities lost value in a high-interest-rate world. 

    At the end of the second quarter, Key’s securities were worth roughly 13% less than what the bank paid for them, according to regulatory data.

    The company sticks most of its investments into the “available-for-sale” accounting bucket, a strategy that some analysts say is wise because it gives Key more flexibility than classifying them as “held-to-maturity” would. If banks sell any chunk of bonds they had planned to hold to maturity, they generally need to absorb losses on the whole portfolio — a penalty that doesn’t apply to selling available-for-sale securities.

    But Key is also a “bit unlucky,” given pending changes from the Fed, said CFRA’s Yokum. The regulators’ recent overhaul of rules for large and regional banks — following the failure of Silicon Valley Bank and First Republic Bank — removes a provision that allowed Key and other banks its size to opt out of quarterly swings in their capital tied to gains or losses on its bond portfolios.

    Megabanks are required to factor in unrealized gains and losses on their available-for-sale securities each quarter, but regional banks are currently shielded from those quarter-by-quarter swings. The Fed’s changes will be phased in, limiting the impact of the change for Key. The end date for some of its securities is also approaching, helping soften the capital blow further since unrealized losses evaporate if securities are held until they mature.

    But some investors are taking a wait-and-see approach on certain banks, and have moved to stocks they view as safer bets.

    “Key has its work cut out for it, and this will be a long road,”  Siefers said. But the company has a “plan in place, and now it comes down to execution,” he added.

    Allissa Kline contributed to this report.

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    Polo Rocha

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  • Credit Suisse Drops Real-Estate Fund IPO Plan

    Credit Suisse Drops Real-Estate Fund IPO Plan

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    By Adria Calatayud

    Credit Suisse said it has abandoned its plan to launch an initial public offering for its Credit Suisse 1a Immo PK real-estate fund due to low trading volumes for listed Swiss real-estate funds.
    

    

    The Swiss bank–now part of UBS Group–said Thursday that Credit Suisse Funds decided not to carry out the IPO, which had been planned for the fourth quarter of 2023, and that this will allow the newly formed real-estate unit within UBS Asset Management to coordinate its offer of real-estate investment services.
    

    A fall in trading volumes on the market for listed Swiss real-estate funds would likely have meant higher volatility in the event of a listing, Credit Suisse said.
    

    The bank last year postponed the IPO of the fund, citing market conditions and the high volatility.
    

    Write to Adria Calatayud at adria.calatayud@dowjones.com
    

    

    

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    After plunging into the political mainstream, Italy’s far-right leader Giorgia Meloni is now shocking markets and upsetting big business
    
			
    After plunging into the political mainstream, Italy’s far-right leader Giorgia Meloni is now shocking markets and upsetting big business
    
			
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    Italian Prime Minister Giorgia Meloni.
    

    Antonio Masiello | Getty Images News | Getty Images
    

    

    

    

    

    After plunging into the political mainstream and winning over her more moderate counterparts in Brussels, hardline Italian Prime Minister Giorgia Meloni is now shaking things up on home soil.
    

    Europe’s main banking index dropped some 2.7% on Aug. 8 after Italy announced it would impose a 40% windfall tax on banks. The surprise move, which clearly caught traders off guard, was toned down within 24 hours.
    

    Airlines have rebuffed other policy measures, with a new government plan to curb prices when flying to certain destinations. The Italian government is meeting airline executives next month and the European Commission, the executive arm of the EU, is already assessing whether the measure would comply with EU law.
    

    Meloni was elected in October and, as well as being the country’s first female PM, is also the first from a far-right party since the end of World War II. So far during her mandate, Meloni has largely fallen in line with mainstream political positions at home and abroad, despite concerns from some that she may push her country to the fringes. She has not been at odds with officials at the European Union, for example. She has also made sure Italy has been a key supporter of Ukraine in the wake of Russia’s invasion of Ukraine, despite the fact that some of her cabinet members have had close ties to the Kremlin.
    

    Federico Santi, a senior analyst at consultancy Eurasia Group, told CNBC via email that her backtrack on the windfall tax “was a major misstep, in perception and substance.”
    

    “This poorly-thought through measure was an abrupt reminder that Meloni’s government is mainly made up of right-wing populist parties, with a track record of erratic economic policy-making,” Santi said, adding however that he expects Meloni to “stay the course” on the fundamental aspects of government policy.
    

    

    

    Erik Jones, a professor at the European University Institute in Italy, told CNBC he didn’t believe this was a more “populist” government than that witnessed over the past year, with Meloni and her finance minister, Giancarlo Giorgetti, trying to spend without running up huge deficits.
    

    “On fiscal policy, even in the absence of binding EU rules, which remain suspended, the government has made efforts to continue a gradual fiscal adjustment, in line with EU recommendations – i.e. by keeping the deficit and debt on a, slowly, declining path and avoiding broad-based expansion that could feed inflation,” Eurasia Group’s Santi said.
    

    Italy’s government debt-to-GDP stood at 144.4% in 2022, according to data from the International Monetary Fund. That’s expected to drop to 140.5% this year and then again to 138.8% in 2024. The Italian economy is seen growing at a rate of 1.1% this year and 0.9% in 2024, according to the IMF. This represents a fall from the 3.7% gross domestic product registered in 2022.
    

    

    What to watch out for
    

    

    Despite the general expectation that the Italian government is unlikely to go down any more controversial avenues, analysts have mentioned two events that international investors should keep a close eye on.
    

    “Investors should worry about the turmoil that is likely to surround this upcoming budget. There will be a lot of room for controversy that will create volatility. But I do not think that the basic policy will change or that the government will collapse,” Jones from the European University Institute said.
    

    Governments across the EU have to submit their budgetary plans for the new year in October so the European Commission can assess whether they comply with EU rules. In the past, this process has raised tensions between Brussels and Rome.
    

    

    

    

    

    

    

    

    

    

    

    

    For others, however, the major risk is a delay in receiving certain EU funds.
    

    “This is a key factor underpinning public investment and growth through 2026, with important knock-on effects on the fiscal outlook,” Santi said.
    

    The EU funds in question were agreed to at the height of the Covid-19 pandemic given the tumult and slowdown across the European economy. Italy’s the biggest beneficiary of the 750 billion euro program ($814 billion) given that its economy was the worst hit by the pandemic and resulting lockdowns. However, disbursements only happen after nations put forward certain measures and reforms.  
    

    The sheer volume of funds could make a critical impact on Italy’s economy.
    

    “These delays are, for the most part, not the government’s own making, and Meloni remains intent on meeting NextGenEU commitments on paper — but external issues, high input costs, supply chains strain; and serious administrative shortfalls and bottlenecks will increasingly prevent the government from meeting its investment targets,” Santi added.
    

    

    

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    U.S. banks and regional lenders slide across the board as S&P is latest to downgrade ratings
    
			
    U.S. banks and regional lenders slide across the board as S&P is latest to downgrade ratings
    
			
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    U.S. banks and regional banks fell across the board on Tuesday, after S&P Global Ratings downgraded five smaller players after a review of risk related to funding, liquidity and asset quality with a focus on office commercial real estate.
    

    Adding to the gloom, Republic First Bancorp. Inc.’s stock
    
        FRBK,
    
        -41.90%
    
       tanked by 39%, after Nasdaq told the company that its stock would be delisted on Wednesday, after it failed to file its annual report in time. 
    

    

    S&P’s move comes just days after Fitch Ratings analyst Christopher Wolfe reduced his operating environment score for U.S. banks to aa- from aa due to the unknown path of interest rate hikes and regulatory changes facing the sector. 
    

    And Moody’s Investors Service just two weeks ago upset investors when it downgraded some lenders and said it was reviewing ratings on bigger banks, including Bank of New York Mellon
    
        BK,
    
        -1.71%    ,
    
       State Street
    
        STT,
    
        -1.59%
    
       and Northern Trust
    
        NTRS,
    
        -1.73%    .
       
    

    For more, see: Bank asset quality, weaker profits spark Moody’s reviews and downgrades as it weighs potential 2024 recession
    

    The S&P 500 Financials Sector has fallen for seven consecutive days, and is on pace for its longest losing streak since April 7, 2022, when it also fell for seven straight trading days.
    

    Individual bank names are also performing poorly, with Goldman Sachs Group Inc.
    
        GS,
    
        -0.94%
    
       and Citigroup Inc.
    
        C,
    
        -1.68%
    
       down for 10 of the past 11 days and Charles Schwab Corp.
    
        SCHW,
    
        -4.84%
    
       down 11 straight days.
    

    Goldman alone has fallen for seven straight days for a total loss of 6.3%. It’s the longest losing streak since Feb. 28, 2020, when it also fell for seven straight days as the pandemic was taking hold. 
    

    The KBW Nasdaq Regional Banking Index
    
        KBWR
    
       is down for 11 straight days. and the KBW Nasdaq Bank Index
    
        BKX
    
       is down for seven straight days. 
    

    S&P downgraded Associated Banc. Corp. 
    
        ASB,
    
        -4.20%    ,
    
       Comerica Inc.
    
        CMA,
    
        -3.82%    ,
    
       KeyCorp
    
        KEY,
    
        -3.58%    ,
    
       UMB Financial Corp. 
    
        UMBF,
    
        -2.42%
    
      % and Valley National Bancorp. 
    
        VLY,
    
        -4.19%
    
       by one notch and said the outlook on all five is stable.
    

    Read also: More challenges await U.S. banks but analysts think the worst may be over for the year
    

    The rating agency affirmed ratings on Zions Bancorp
    
        ZION,
    
        -4.17%
    
       and maintained a negative outlook, meaning it could downgrade them again in the near-term. And it affirmed ratings and a stable outlook on Synovus Financial Corp. 
    
        SNV,
    
        -3.37%
    
       and Truist Financial Corp. 
    
        TFC,
    
        -1.36%    
      
    

     “We reviewed these 10 banks because we identified them as having potential risks in multiple areas that could make them less resilient than similarly rated peers ,” S&P said in a statement. 
    

    “For instance, some that have seen greater deterioration in funding—-as indicated by sharply higher costs or substantial dependence on wholesale funding and brokered deposits—-may also have below-peer profitability, high unrealized losses on their assets, or meaningful exposure to CRE.” 
    

    The steep rise in interest rates orchestrated by the Federal Reserve over the past year has raised deposit costs as banks are now competing for savers seeking higher returns and that’s forced some to pay up on deposits and discourage their clients from heading to other institutions and instruments.
    

    The sector has been skittish this year following the collapse of Silicon Valley Bank and other lenders that led to a run on deposits at a number of regional lenders.
    

    However, S&P said about 90% of the banks it rates have stable outlooks and just 10% have negative ones. None have positive outlooks. 
    

    The widespread stable outlooks shows that stability in the U.S. banking sector has improved significantly in recent months. 
    

    S&P is expecting FDIC-backed banks in aggregate to earn a relatively healthy ROE of about 11% in 2023.
    

    KeyCorp. and Comerica both fell more than 3% on the news. Of the two, KeyCorp. has more outstanding debt and its 10-year bonds widened by about 5 to 10 basis points, according to data solutions provider BondCliq Media Services.
    

    As the following chart shows, the bonds have seen better selling on Wednesday with buyers emerging around midmorning.
    

    

              
    

    

    
          
    
            KeyBank net customer flow (intraday). Source: BondCliQ Media Services
    
          
    
  
    

    

    The next chart shows customer flow over the last 10 days.
    

    

              
    

    

    
        
      
    
          
    
            Most active KeyBank issues with net customer flow (last 10 days). Source: BondCliQ Media Services
    
          
    
  
    

    

    The next chart shows the outstanding debt of the downgraded banks, with KeyCorp. clearly the leader with almost $16 billion of bonds.
    

    

              
    

    

    
        
      
    
          
    
            Outstanding S&P downgraded banks debt USD by maturity bucket. Source: BondCliQ Media Services
    
          
    
  
    

    

    Don’t miss: Capital One confirms roughly $900 million sale of office loans as property sector wobbles
    

    

    

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  • 
		
		
    
			
    Small business confidence is tanking again, especially when it comes to banks and Biden
    
			
    Small business confidence is tanking again, especially when it comes to banks and Biden
    
			
     [ad_1]
    

    

    As President Biden begins to more forcefully build a reelection case citing Bidenomics, Wall Street forecasts and actual GDP data are supportive, as are recent improving sentiment scores from consumers and CEOs. But on Main Street, small business owners remain a difficult group for Biden to win over.
    

    Small business confidence is back at an all-time low, according to the just-released CNBC|SurveyMonkey Small Business Survey for the third quarter. That’s nothing new for Biden, as small business confidence has hung around a low throughout his presidency. In fact, the latest decline in the confidence index to a score of 42 out of 100 matches the all-time low from exactly one year ago.
    

    With a business owner demographic that skews conservative, the twin economic issues of inflation and rising interest rates have compounded the general concerns about a Democratic administration. But at a time when signs are pointing to progress in the fight against inflation and a potential though by no means certain end to Federal Reserve interest rate hikes, the Q3 data presents more specific — and potentially more troubling — concerns for the president.
    

    Even with a resilient economy, with interest rates at a multi-decade high, the number of small business owners who say they can easily access the capital needed to operate their firms continues to decline, now at under half (48%) versus 53% last quarter. This should not come as a surprise, as higher interest rates make banks stricter when it comes to lending requirements, a dynamic that tends to disproportionately punish small businesses, and linger or even intensify the longer a higher rate environment persists. Even for businesses that can secure loans, double-digit percentage rates are a cash flow challenge.
    

    Data released on Monday from small business trade group NFIB reported similar difficulty among business owners attempting to access capital, with over half (58%) who borrowed or tried to borrow reporting high interest rates as their biggest complaint, and 40% of owners saying interest rates were a significant issue in the ability to access capital.
    

    Wall Street banks and Main Street lending
    

    The latest monthly report from alternative lending firm Biz2Credit from earlier this month shows small business loan approval percentages at banks with over $10 billion in assets at 13.3% in July, an approval rate that has been falling steadily and, pre-pandemic, had been as high as 28.3% in February 2020.
    

    Rohit Arora, CEO of Biz2Credit, noted in a release on his firm’s data that as regulators raise capital requirements at some large banks in the years ahead, steps being taken today to prepare include more hesitancy to lend to smaller companies, since these loans can often range from five to seven years in term length.
    

    Beyond recent concerns about the stability of regional banks, rating agencies say that even the largest Wall Street banks are on downgrade watch, not a situation in which banks are likely to be more accommodating to the capital needs of small firms, and in fact, the CNBC|SurveyMonkey data recorded a sharp drop in financial system confidence among business owners who work with large banks.
    

    When it comes to accessing capital, small firms that hold accounts with large banks recorded the largest drop quarter-over-quarter, a 10% decline, from 59% saying it was easy for them to access business capital down to just 49% now. That was a much larger decline than among business owners who bank with a regional bank (down 2% quarter over quarter) and those who work with a community bank (down 4%). The largest group of small businesses (41%) conduct their business with large banks.
    

    SurveyMonkey’s analysis of the data pointed to a gap between business owners who express confidence and a lack of confidence in banks that has widened from just 1 percentage point in Q2 (49% confident, 50% not confident) to 9 points now (45% confident, 54% not confident) this quarter.
    

    “These data are a good reminder that the general economy for small business owners can often be very different from the economy that consumers on one side or large corporations on the other are experiencing,” said Laura Wronski, research science manager at SurveyMonkey.
    

    The CNBC|SurveyMonkey Small Business Survey was conducted among over 2,000 small business owners across the U.S. between August 7-August 14.
    

    While concerns across the economy about the banking crisis have lessened since the last quarter, that is not reflected in the conditions that small businesses are facing.
    

    “Banking concerns have become even more top-of-mind for small business owners now, with their confidence in the U.S. banking system weakening and their ability to access needed capital hampered,” Wronski said.
    

    Biden’s business supporters are increasingly negative
    

    The CNBC|SurveyMonkey quarterly confidence index includes a series of core sentiment indicators related to policy that contributed to the decline back to the all-time low, with more small business owners saying they expect immigration policy and tax policy to be a negative. 
    

    That’s notable, according to SurveyMonkey analysis of the results, with these index components that had the largest drag on the overall scores not those tied to hiring or economic conditions, but “two factors that fall squarely within the remit of the president and Congress.”
    

    Business owner expectations for revenue and hiring were largely unchanged, and the percentage that describe economic conditions as “good” changed only slightly, from 40% to 38%. More describe conditions as “middling,” up from 43% to 46% this quarter. But only 15% describe business conditions as “bad.” 
    

    “Small business owners seem to be more heavily factoring the political environment into their confidence estimations than the economic environment. The economy has shown promising growth over the last quarter, with fewer concerns about a recession economy-wide now and less immediate threat from a banking crisis,” Wronski said.
    

    

    

    In the confidence index scoring, rather than broader survey questions, there was a notable drop for Biden. According to SurveyMonkey, overall approval of the president now matches the same level as Q3 2022 survey, with 31% saying they approve and 68% saying they disapprove of the way Joe Biden is handling his job as president. The small business survey data matches the overall trend in the recent FiveThirtyEight polling average. 
    

    But Wronski said, “What’s really surprising is that general confidence among small business owners is falling now for the first time among Biden’s supporters.”
    

    With the overall confidence index back at the all-time low of 42, the gap in confidence index scoring specifically between Biden’s supporters and his detractors is now a record-low 18 points, according to SurveyMonkey (55 versus 37). Among survey respondents who identify as Democrats, the quarterly confidence score declined from 58 to 52, the lowest it has been since Biden became president. Among independents, the decline was from 49 to 42, the lowest it has been among these respondents since the first quarter of 2021. Republican confidence moved the least, declining from a score of 39 to 37.
    

    

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  • 
		
		
    
			
    Does the commercial lending slump hint at a looming recession?
    
			
    Does the commercial lending slump hint at a looming recession?
    
			
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    Markets are optimistic that the Federal Reserve will achieve a “soft landing,” but recent softness in commercial lending trends raises the risk that the country will slip into a recession, according to economists and analysts.
    

    Bank lending to commercial clients — businesses big and small — has fallen from January highs as companies’ wariness over the economic outlook persists. The outlook for loan growth isn’t particularly strong either, thanks to a combination of reduced demand from commercial clients and tighter standards from banks. 
    

    That mix can damage the economy as businesses slow their expansions, hire fewer people and ultimately set off dominoes that will result in layoffs. The U.S. economy has proved to be surprisingly resilient over the past year, but the slowdown in commercial borrowing will be the latest test.
    

    “This actually points to a deep recession, yet we’re not actually seeing it on the surface yet,” said Derek Tang, an economist and the CEO of Monetary Policy Analytics. “This is what is making everyone a little bit nervous.”
    

    

    

      
    

    

    Banks have been rapidly tightening their underwriting standards over the past year, according to a Fed survey of senior loan officers at banks. They’re raising the bar for commercial borrowers seeking loans, turning more often to only those borrowers whose profits can deliver. And banks are charging higher interest rates to make up for what they see as a slightly riskier environment.
    

    Those steps are a “credit positive” for individual banks, as they appear to be “getting ahead of the curve” and avoiding future losses by taking less risk, said Allen Tischler, senior vice president at the ratings firm Moody’s Investors Service. But the combined effects of businesses having a harder time getting credit can lead to pain later.
    

    “That might not impact employment negatively tomorrow, or the following week, or the following month,” Tischler said. “But at some point, you would see it show up in employment.”
    

    So far, the job market remains mostly solid, with employers adding 187,000 jobs last month and the unemployment rate at 3.5%. The economy’s resilience has made some analysts less gloomy. Goldman Sachs trimmed its recession probability to 20%, and Bank of America scrapped its recession forecast. Other economists still see a mild downturn ahead.
    

    Credit quality remains benign among banks’ commercial clients, which are staying current on their loan payments even with interest rates at 22-year highs. Some sectors like trucking are undergoing more pain, but banks aren’t being forced to charge off many loans from borrowers that have run into trouble.
    

    The rate of commercial and industrial loan net charge-offs across the industry was just 0.26% in the first quarter, compared with an average of 0.84% since 1984, according to Truist Securities analyst Brandon King, who focuses on regional and community banks.
    

    But the risk of those figures climbing “remains overlooked” compared with investors’ constant worries over commercial real estate, King wrote in a note to clients. Credit conditions haven’t been this tight since the start of the pandemic, when the government minimized loan losses by flooding consumers and businesses with cash, he wrote. 
    

    That level of help is unlikely this time around, and charge-off rates could hit 1% if the U.S. economy slips into a recession, King wrote. Such distress would not be as severe as during prior recessions, but the tougher outlook means that banks may soon have to set aside more money to cover potential losses, he added.
    

    Commercial bankers acknowledge that some indicators are trending negative, but say they’re cautiously optimistic — and still open for business even as they tighten around the margins.
    

    Mary Katherine DuBose, the head of Wells Fargo Credit Solutions at the company’s commercial bank, said in an interview that her team still has “great appetite to lend to quality borrowers.” The team is also running analyses to ensure that its portfolio stays in good shape no matter what comes next, DuBose said.
    

    “We are building in more aggressive rate shocks and rate analysis and cash-flow analysis to make sure that borrowers can absorb that, as well as … weaker margins because that’s a theme and a trend that we’re seeing,” she added.
    

    Stephanie Novosel, head of commercial banking at PNC Financial Services Group, said the $558 billion-asset bank is also not seeing much “stress and strain” in its portfolio. She said some clients are in a “wait-and-see” mode as they wait for the economic outlook to clear up.
    

    And rather than borrowing, some business customers are using the cash they built up in recent years to pay for their expansions, Novosel said.
    

    Companies are “doing the math” and opting against saddling themselves with loans that carry rates of 7% or higher, Truist’s King said. Since that cash is coming out of banks’ deposit coffers, the outflows are a headache for smaller regional banks that are paying up to retain depositors, he added. 
    

    The more tepid pace of loan growth — a mix of borrower and lender caution — lines up with broader signs that the U.S. economy may grow by less than 1% in the coming quarters, said Richard Moody, chief economist at Regions Financial. 
    

    Even if the country ultimately steers clear of a recession, the coming months may still feel a bit like one.
    

    “The outlook is for a period of very slow growth,” Moody said. 
    

    And that, ultimately, may be a good enough outcome for the Fed, said Danielle Marceau, a principal economist at the data and forecasting firm Prevedere. The central bank has sought to raise rates “just enough to cool the economy” without completely choking off growth.
    

    “If banks become more conservative, if they continue to tighten their lending standards, if they reduce loan availability a little bit, that can help curb that spending, which is exactly what the Fed needs to navigate a soft landing,” Marceau said.
    

    

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     Sabrina Lee
    

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  • 
		
		
    
			
    PNC sells $750 million of bonds as banks rush to raise cash
    
			
    PNC sells $750 million of bonds as banks rush to raise cash
    
			
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    PNC’s securities are said to have yielded 1.73 percentage points over Treasuries, compared with early pricing discussions of 1.95 percentage points. 
    Stefani Reynolds/Bloomberg
    

    

    

    

    PNC Financial Group Services has tapped the U.S. blue-chip bond market for the second time since a regional banking crisis rattled investors earlier this year.
    

    The Pittsburgh-based bank priced $750 million of fixed-to-floating rate notes due in 2034 on Tuesday, according to a person familiar with the matter, who asked not to be identified as the details are private. The securities yielded 1.73 percentage points over Treasuries, compared with early pricing discussions of 1.95 percentage points, the person added. 
    

    PNC’s deal is the latest in a string of recent bank bond sales. Bank of America on Monday sold $5 billion of senior unsecured notes in four parts, while Goldman Sachs Group issued $1.5 billion of notes. The regional lender Huntington Bancshares also tapped markets for $1.25 billion of bonds.
    

    The offerings come as companies rush to raise capital before the cyclical summer slowdown that typically kicks in toward the end of August. PNC last issued in early June, when it raised $3.5 billion of bonds. 
    

    For regional banks, there’s an incentive to tap investment-grade debt markets while funding costs are relatively low. The extra yield investors demand to hold financial bonds over average blue-chip debt has been declining since April, according to data compiled by Bloomberg.
    

    On Wall Street, focus has also shifted to proposals from U.S. regulators that would require lenders to raise more capital to protect them from market shocks. That could lead to even more issuance, especially from regional banks, as lenders anticipate stricter rules.
    

    Jacobs Engineering Group and Alexander Funding Trust II were also in the market with deals Tuesday.
    

    Representatives for PNC, Jacobs Engineering and Alexander Funding didn’t respond to requests for comment. 
    

    — With assistance from Brian Smith
    

    

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  • 
		
		
    
			
    Banks, usually hungry for growth, are now looking to shrink
    
			
    Banks, usually hungry for growth, are now looking to shrink
    
			
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    Citizens Financial, Capital One Financial and Synovus Financial are among the banks that have recently announced steps to shrink specific parts of their lending businesses.
    

    

    

    Bankers that long focused on growth have a new goal: getting smaller.
    

    The goal isn’t universal, as some banks still see opportunities and are picking up the pieces their competitors are leaving behind. But much of the industry is slimming down. 
    

    Bankers are tightening their underwriting. They’re cutting back or calling it quits on riskier or less profitable businesses. And they’re selling loans they no longer want, which helps them shrink their balance sheets and raise cash.
    

    “Growing in today’s environment, at the same rate as what you’re used to, is less profitable,” said Chris McGratty, head of U.S. bank research at Keefe, Bruyette & Woods, pointing to rising deposit costs that are narrowing the profits banks make on loans. “So banks are being more selective on what they put on their balance sheets.”
    

    The slimming down is particularly prominent at banks with more than $100 billion of assets, which are preparing to comply with tougher capital rules from the Federal Reserve. Trimming risk-weighted assets improves a bank’s capital ratios at a time when some banks will likely have to start holding bigger cushions to guard against losses.
    

    Capital One Financial in McLean, Virginia, put $900 million of its commercial office loans up for sale. Citizens Financial in Providence, Rhode Island, said it would stop offering loans to car buyers in collaboration with auto dealers. Truist Financial in Charlotte, North Carolina, sold a $5 billion student loan portfolio.
    

    At Cincinnati, Ohio-based Fifth Third Bancorp, executives said they’re on an “RWA diet.” In other words, they’re reducing the company’s risk-weighted assets as they bolster capital ratios ahead of the new Fed rules.
    

    Regional banks aren’t the only ones looking to get smaller. Banks “of all shapes and sizes” are seeing opportunities to exit certain businesses or sell some loans, said Terry McEvoy, a bank analyst at Stephens.
    

    Banks may take a loss by selling loans below their original value, but getting rid of them earlier may also have benefits. For example, if a glut of office loans becomes available for sale, the properties’ values may plummet, causing bigger losses among banks that waited to sell, McEvoy said.
    

    “Those that are the first to exit may get the best price when it’s all said and done, and we’re not going to know that for quite some time,” McEvoy said.
    

    Banks are not retreating from all sectors equally. Big banks reported strong growth last quarter in their consumer credit card portfolios, even as some took a more cautious tone on auto lending. 
    

    Bank OZK, in Little Rock, Arkansas, is “cautiously optimistic about our continued growth prospects,” CEO George Gleason said. Many of the bank’s competitors “are shrinking and laying off some really good people,” Gleason told analysts, giving the $30.8 billion-asset OZK a chance to pick up talent and gain new customers. Most of the bank’s loans are in the real estate sector, particularly construction.
    

    “We’re putting on really great quality new assets and getting paid well for it,” Gleason said. “So we view it as a very opportunistic time for growth.”
    

    Advisers who help banks buy and sell loans are busy.
    

    “The market for selling loans is very vibrant,” said Jon Winick, CEO of the bank advisory firm Clark Street Capital. He predicted there will be “a lot more selling” in the coming months.
    

    In consumer banking, auto loan sales have been popular, and sales of home equity lines of credit are “on fire,” said John Toohig, head of whole loan trading at Raymond James. 
    

    Banks that are selling their HELOC originations can do so “at a premium, which is hard to do these days,” Toohig said. HELOCs are fetching good prices because other banks want the short-term, floating-rate loans. Those features balance out the 30-year mortgages sitting on banks’ balance sheets, particularly mortgages they made during the pandemic boom when interest rates were at historic lows.
    

    “It’s very balance sheet-friendly for banks and credit unions,” Toohig said. “They love to own it as a way to offset some of that 30-year fixed rate that’s killing their margin.” 
    

    There’s also plenty of interest from banks in reducing their exposure to office buildings, whose values vary depending on their location, age and occupancy rate, as remote work becomes more popular.
    

    Within the office sector, the main properties being sold right now are either “trophies” or “trash,” Toohig said. Loans backed by newer properties with healthy occupancy trends can fetch good prices. Other loans are clearly “in the ditch,” and banks are scrambling to figure out how to get them off their balance sheets, Toohig said.
    

    Some lenders are also taking the opportunity to sell certain performing loans, as it gives them cash to pay off any borrowings they took on during this spring’s banking turmoil. 
    

    Columbus, Georgia-based Synovus Financial, for example, sold $1.3 billion in medical office loans. The credit quality of those loans “was so pristine that we were able to get what we believe was a very fair price,” Chief Financial Officer Andrew Gregory told analysts. 
    

    Hedge funds and private equity firms are willing to scoop up less attractive commercial real estate loans. But they’ll only buy them at a steep discount, and some banks haven’t yet accepted that their portfolios will fetch far less money than they’d like.
    

    Banks may be willing to accept, say, 90 cents on the dollar for tarnished commercial real estate loans. The problem is that buyers are sometimes looking to buy riskier loans at just 60 or 70 cents, or even less.
    

    “In a lot of cases, sellers just aren’t there yet,” Clark Street Capital’s Winick said. “They have the desire to sell at some level, but they don’t have the desire to sell at the market level.”
    

    That hesitancy could cost banks if property values fall further, or if an office building suddenly runs out of tenants, Winick said. While absorbing a big loss early is costly, so is waiting and taking a bigger charge-off later.
    

    “Your first loss is always your best loss, or usually your best loss,” Winick said. “I can give you a million examples where banks waited too long to move on a credit that was going sideways.”
    

    

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    FDA approves first-ever pill for postpartum depression in new mothers
    
			
    FDA approves first-ever pill for postpartum depression in new mothers
    
			
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    The Food and Drug Administration late Friday approved the first-ever pill that can be taken at home for postpartum depression. 
    

    The medication, called zuranolone, and jointly developed by pharmaceutical companies Biogen Inc.
    
        BIIB,
    
        +0.44%
    
       and Sage Therapeutics
    
        SAGE,
    
        +0.25%    ,
    
       is taken daily for two weeks, the FDA said in its release.
    

    

    In a pair of clinical trials involving women who experienced severe depression after having a baby, the drug improved symptoms including anxiety, trouble sleeping, loss of pleasure, low energy, guilt or social withdrawal as soon as three days after the first pill.
    

    “Postpartum depression is a serious and potentially life-threatening condition in which women experience sadness, guilt, worthlessness — even, in severe cases, thoughts of harming themselves or their child,” said Tiffany Farchione, M.D., director of the Division of Psychiatry in the FDA’s Center for Drug Evaluation and Research. 
    

    ”And, because postpartum depression can disrupt the maternal-infant bond, it can also have consequences for the child’s physical and emotional development,” she said.
    

    Women who are breastfeeding or had mild or moderate depression weren’t included in the trials.
    

    Until now, the only available option for this condition has been an intravenous injection that the FDA approved in 2019. It requires patients to stay in a hospital for two-and-a-half days.
    

    Postpartum depression affects one in eight new mothers in the U.S., according to the Centers for Disease Control and Prevention. Researchers suggest the actual rate may be higher and that half of such cases go undiagnosed. 
    

    Research finds that postpartum depression is more intense and lasts longer than the typical worries, sadness or tiredness that many women experience after giving birth. The condition can make it harder for mothers to bond with their babies and may increase the likelihood of developmental delays in infants.
    

    Drug overdoses and suicides are leading causes of maternal death in the U.S., contributing to nearly one in four pregnancy-related deaths, according to the CDC. 
    

    Zuranolone stimulates a brain receptor called GABA that slows down the brain and helps control anxiety and stress. The drug, through trials, is thought to calm women suffering from postpartum depression enough to allow them to rest, which also improves symptoms. 
    

    Shares of Biogen are up 23% over the past year, and Sage has lost 14%, while the S&P 500
    
        SPX
    
       is up 8% over the same time.
    

    

    

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    Puzzled by the stock-market surge? Overshoots are the new normal, Bank of America strategist says
    
			
    Puzzled by the stock-market surge? Overshoots are the new normal, Bank of America strategist says
    
			
     [ad_1]
    

    

    Stocks have surged this year without really anything going right, besides the rolling out of error-prone artificial intellligence chatbots. Interest rates have surged to a 22-year high, earnings are down from last year, and pandemic-era savings are being drawn down if not entirely exhausted.
    

    Read more: Those extra pandemic savings are now wiped out, Fed study finds.
    

    

    Strategists at Bank of America led by Michael Hartnett have an interesting theory.
    

    “Asset price overshoots [are] the new normal,” they say.
    

    Consider:
    

      

    • 
      Oil
      
        CL00,
      
        -0.37%
      
       went from -$37 in April 2020 to $123 in March 2022, then down to $67 the following 12 months.
      

      • 

    • 
      Bitcoin
      
        BTCUSD,
      
        +0.32%
      
       went from $5,000 in January 2020 to $68,000 in November 2021, down to $16,000 a year later, and up to $29,000 now.
      

      • 

    • 
      The S&P 500 went from 3300 to 2200 to 4800 to 3500 to 4600 thus far in 2020s.
      

      • 

    

    “AI is simply the new overshoot,” they say.
    

    The S&P 500
    
        SPX,
    
        +0.67%
    
       has gained 18% this year as the Nasdaq Composite
    
        COMP,
    
        +1.53%
    
       has rallied by 34%.
    

    Hartnett and team noted that real retail sales — that is, adjusted for inflation — fell at a 1.6% year-over-year clip, which has coincided with recessions since 1967. Real retail sales falls in excess of 3% are associated with hard recessions.
    

    Historically, a 2-3 point rise in the savings rate also is recessionary, and already it’s risen from 3% to 4.6%. The unemployment rate so far hasn’t risen, though a 0.5 point to 1 point rise in the jobless rate also is typically recessionary.
    

    “It would be so ‘2020s’ for the economy to hit a brick wall just as everyone punts ‘soft landing’ into 2024,” they say.
    

    They like emerging market/commodities as summer upside plays and credit and tech as autumn downside plays.
    

    

    

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    Banc of California is expected to keep leading regional banks higher as PacWest deal ignites sector
    
			
    Banc of California is expected to keep leading regional banks higher as PacWest deal ignites sector
    
			
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    Banc of California Inc.’s proposed agreement to acquire PacWest Bancorp. helped send regional-bank stocks considerably higher on Wednesday. But even after a two-day increase of 12% for its shares, the acquiring bank remains the favorite name among analysts covering regional players in the U.S.
    

    The merger agreement was announced after the market close on Tuesday, but the rumor mill had already sent Banc of California’s
    
        BANC,
    
        +0.62%
    
       stock up by 11% that day. Then on Wednesday, shares of PacWest Bancorp
    
        PACW,
    
        +26.92%
    
       shot up 27% to $9.76, which was above the estimated takeout value of $9.60 a share when the deal was announced. The merger deal, if approved by both banks’ shareholders, will also include a $400 million investment from Warburg Pincus LLC and Centerbridge Partners L.P.
    

    

    A screen of regional banks by rating and stock-price target is below.
    

    Deal coverage:
    


    With PacWest closing above the initial per-share deal valuation, it is fair to wonder whether or not its shareholders will vote to approve the agreement. In a note to clients on Wednesday, Wedbush analyst David Chiaverini called Banc of California’s offer “fair, but not overwhelmingly attractive,” and wrote that PacWest was “a likely seller before the mini banking crisis occurred in March.”
    

    While Chiaverini went on to predict the deal’s approval by PacWest’s shareholders, he added that he “wouldn’t be surprised if there were some dissent among a minority of shareholders [which could] possibly open the door to the potential emergence of a third-party bid.”
    

    More broadly, Odeon Capital analyst Dick Bove wrote to clients on Wednesday that the merger deal, along with increasing involvement of private-equity firms in lending businesses, the expected enhancement of regulatory capital requirements for banks and other factors could lead to more consolidation among smaller banks. 
    

    He went on to write that we might be entering a period for the banking industry similar to the 1990s, “when rules were being changed and acquisitions were rampant,” which “created new investment opportunities.” 
    

    The SPDR S&P Regional Banking exchange-traded fund
    
        KRE,
    
        +4.74%
    
       rose 5% on Wednesday but was still down 17% for 2023, while the SPDR S&P 500 ETF Trust
    
        SPY,
    
        +0.02%
    
       was up 19%, both excluding dividends.  
    

    KRE holds 139 stocks, with 98 covered by at least five analysts working for brokerage firms polled by FactSet. Out of those 98 banks, 45 have majority “buy” ratings among the analysts. Among those 45, here are the 10 with the most upside potential over the next 12 months, implied by consensus price targets:
    

    

    

      Bank
    
    		

      Ticker
    
    		

      City
    
    		

      Total assets ($mil)
    
    		

      July 26 price change
    
    		

      Share buy ratings
    
    		

      July 26 closing price
    
    		

      Consensus price target
    
    		

      Implied 12-month upside potential
    
    		

    

    

      Banc of California Inc.
    
    		

        BANC,
    
        +0.62%    
          		

      Santa Ana, Calif.
    
    		

      $9,370
    
    		

      1%
    
    		

      71%
    
    		

      $14.71
    
    		

      $18.58
    
    		

      26%
    
    		

    

    

      Enterprise Financial Services Corp.
    
    		

        EFSC,
    
        +1.83%    
          		

      Clayton, Mo.
    
    		

      $13,871
    
    		

      2%
    
    		

      80%
    
    		

      $41.75
    
    		

      $49.25
    
    		

      18%
    
    		

    

    

      First Merchants Corp.
    
    		

        FRME,
    
        +3.52%    
          		

      Muncie, Ind.
    
    		

      $17,968
    
    		

      4%
    
    		

      100%
    
    		

      $32.38
    
    		

      $37.33
    
    		

      15%
    
    		

    

    

      Amerant Bancorp Inc. Class A
    
    		

        AMTB,
    
        +3.47%    
          		

      Coral Gables, Fla.
    
    		

      $9,520
    
    		

      3%
    
    		

      60%
    
    		

      $20.26
    
    		

      $23.30
    
    		

      15%
    
    		

    

    

      Old Second Bancorp Inc.
    
    		

        OSBC,
    
        +3.39%    
          		

      Aurora, Ill.
    
    		

      $5,884
    
    		

      3%
    
    		

      100%
    
    		

      $16.15
    
    		

      $18.50
    
    		

      15%
    
    		

    

    

      F.N.B. Corp.
    
    		

        FNB,
    
        +2.87%    
          		

      Pittsburgh
    
    		

      $44,778
    
    		

      3%
    
    		

      75%
    
    		

      $12.91
    
    		

      $14.50
    
    		

      12%
    
    		

    

    

      Columbia Banking System Inc.
    
    		

        COLB,
    
        +3.95%    
          		

      Tacoma, Wash.
    
    		

      $53,592
    
    		

      4%
    
    		

      55%
    
    		

      $22.63
    
    		

      $25.32
    
    		

      12%
    
    		

    

    

      Wintrust Financial Corp.
    
    		

        WTFC,
    
        +3.43%    
          		

      Rosemont, Ill.
    
    		

      $54,286
    
    		

      3%
    
    		

      92%
    
    		

      $86.05
    
    		

      $95.33
    
    		

      11%
    
    		

    

    

      Synovus Financial Corp.
    
    		

        SNV,
    
        +6.01%    
          		

      Columbus, Ga.
    
    		

      $60,656
    
    		

      6%
    
    		

      75%
    
    		

      $34.06
    
    		

      $37.73
    
    		

      11%
    
    		

    

    

      Home BancShares Inc.
    
    		

        HOMB,
    
        +4.56%    
          		

      Conway, Ark.
    
    		

      $22,126
    
    		

      5%
    
    		

      57%
    
    		

      $24.09
    
    		

      $26.67
    
    		

      11%
    
    		

    

    

      Source: FactSet
    
    		

    

    

    Click on the tickers for more about each bank.
    

    Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
    

    Any stock screen can only be a starting point when considering whether or not to invest. If you see any stocks of interest here, you  should do your own research to form your own opinion.
    

    Don’t miss: How you can profit in the stock market from an incredible financial-services trend over the next 20 years
    

    

    

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    Embattled PacWest to sell to Banc of California for $1B
    
			
    Embattled PacWest to sell to Banc of California for $1B
    
			
     [ad_1]
    

    

    

    

     

    A PacWest branch in Encino, California. It was announced on Tuesday that the Los Angeles-based institution had agreed to sell to Banc of California. The transaction is expected to close later this year or in early 2024. 
    Morgan Lieberman/Photographer: Morgan Lieberman/B
    

    

    

    

    Banc of California in Santa Ana has agreed to purchase PacWest Bancorp in Los Angeles in an all-stock transaction valued at $1 billion.
    

    If regulators approve the deal, Banc of California’s acquisition of PacWest would create a $36 billion-asset institution heavily concentrated in the Southern California market. The combined bank’s deposits would total $30.5 billion and its loan portfolio would total $25.3 billion, according to a Banc of California press release. Banc of California has $9.4 billion of assets at the end of the second quarter. PacWest had roughly $44 billion of assets as of the first quarter.  
    

    The merger is intended to “capitalize on the opportunities created for stronger financial institutions in the wake of the recent banking industry turmoil,” Banc of California CEO Jared Wolff said in the statement. Wolff would retain his leadership position at the bank.
    

    The merger was announced shortly after the stock market’s close on Tuesday, though reports of the pending transaction earlier in the day drove PacWest’s stock price down by 27% while Banc of California’s stock ended the trading session up 11%.
    

    PacWest shareholders would receive two-thirds of a share of Banc of California for each owned share of PacWest, according to the press release.
    

    PacWest was among the beleaguered West Coast banks impacted by deposit runoff and market volatility earlier this year that began after the collapse of Silicon Valley Bank in March. In April, PacWest reported losing almost $6 billion in deposits during the first quarter.
    

    Details of the transaction include the repayment of around $13 billion in wholesale borrowings, which will be funded by asset sales and excess cash. PacWest had already begun shedding assets, including a $3.5 billion loan portfolio sale in May.
    

    Banc of California also announced on Tuesday a capital injection totaling $400 million from private equity firms Warburg Pincus and Centerbridge Partners. The money will allow the bank to “reposition” its balance sheet and “generate material savings,” the press release said.
    

    Banc of California expects to have an 85% loan-to-deposit ratio and a 10% common equity Tier 1 capital ratio after the pending acquisition closes. The bank is estimating that earnings per share in 2024 would be between $1.65 and $1.80.
    

    During a call with analysts following the deal announcement, Wolff said that the Banc of California’s acquisition of PacWest “bolsters capital and liquidity” of the combined businesses to create the third-largest commercial bank headquartered in California.
    

    Post-merger Banc of California will target “in-market relationship banking” by focusing on treasury management services and loan growth to boost “low-cost” commercial deposits, Wolff said during the call.
    

    “The heart of the combined company is going to be the community banking franchise,” Wolff said.
    

    Bank merger-and-acquisition activity has been sluggish through much of the year. There have been just 34 deals announced this year from Jan. 1 to June 14, down from 81 for the same period in 2022, according to Janney Montgomery Scott analyst Brian Martin. In addition to the Banc of California-PacWest deal, Atlantic Union announced on Tuesday that it would buy American National in a transaction valued at $417 million. 
    

    A number of recent deals have struggled to close either because of market volatility or regulatory concerns. TD Bank and First Horizon called off their long-delayed merger earlier this year due to problems securing regulatory approvals, for instance. 
    

    Wolff said during the conference call that the purchase of PacWest was “previewed” with regulators and that the timeline for the deal to close later this year or in early 2024 is “achievable.”
    

    In response to an analyst’s question about the cultural fit of combining two banks through a merger, Wolff said that he has never seen a deal with “this amount of overlap and commonality between the two players.”
    

    The announcement led both Banc of California and PacWest to postpone their scheduled second-quarter earnings presentations.
    

    

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    PacWest stock rockets nearly 40% after Banc of California confirms plan to buy troubled bank
    
			
    PacWest stock rockets nearly 40% after Banc of California confirms plan to buy troubled bank
    
			
     [ad_1]
    

    

    PacWest Bancorp’s stock jumped more than 38% in after-hours trading Tuesday after the company said it had agreed to be acquired by Banc of California Inc. in an all-stock merger backed by two private-equity firms. The merger comes as PacWest looks to put a rocky period behind it.
    

    Under the terms of the merger agreement, PacWest
    
        PACW,
    
        -27.04%
    
       stockholders will receive 0.6569 of a share of Banc of California common stock for each share of PacWest common stock. Based on closing prices on Tuesday, the deal values PacWest at $9.60 a share, a premium over its closing price of $7.67 a share on Tuesday.
    

    

    Warburg Pincus and Centerbridge will provide $400 million in equity. 
    

    PacWest stockholders will own 47% of the outstanding shares of the combined company, while the private-equity investors will own 19% and Banc of California shareholders will have 34%. 
    

    PacWest said that it is the company being acquired and that it will change its name to Banc of California. PacWest said it will be the “accounting acquirer,” with fair-value accounting applied to Banc of California’s balance sheet at closing.
    

    Banc of California CEO Jared Wolff will retain the same role at the combined company. 
    

    The combined company will repay about $13 billion in wholesale borrowings to be funded by the sale of assets, “which are fully marked as a result of the transaction, and excess cash,” the companies said.
    

    The merged company is currently projecting about $36.1 billion in assets, $25.3 billion in total loans, $30.5 billion in total deposits and more than 70 branches in California.
    

    John Eggemeyer, the independent lead director at PacWest, will be chair of the board of the combined company following the merger. 
    

    The board of directors of the combined company will consist of 12 directors: eight from the existing Banc of California board, three from the existing PacWest board and one from the pair of private-equity firms led by Warburg Pincus.
    

    Citing sources close to the deal, the Wall Street Journal had reported earlier that a tie-up was imminent. 
    

    In regular trading Tuesday, PacWest’s stock ended 27% down; trading was halted for volatility following the report of the deal.
    

    Banc of California’s stock rose 11% but was later halted for news pending as well. The stock rose more than 9% in after-hours trading on Tuesday.
    

    At last check, PacWest’s market capitalization was about $1.2 billion, while Banc of California’s was about $764 million. Combined, the business would be worth about $2 billion.
    

    PacWest’s big share-price move on Tuesday marks the latest in a volatile few months for the Beverly Hills, Calif., bank, which was founded in 1999. 
    

    Investors had speculated that the bank could be the next to fail after Silicon Valley Bank and Signature Bank failed in March and First Republic Bank was taken over by JPMorgan. 
    

    Also on Tuesday, PacWest said it lost $207.4 million, or $1.75 a share, in its second quarter, as it got a hit from items related to loan sales and restructuring of its lending unit Civic. The loss contrasts with earnings of $122 million, or $1.02 a share, in the year-ago period. 
    

    Analysts polled by FactSet expected the bank to report a loss of 58 cents a share in the quarter.  
    

    PacWest disclosed in recent months that it was  exploring strategic alternatives while it sold off parts of its business to raise cash to strengthen its balance sheet. It sold a loan portfolio to Ares Management Corp.
    
        ARES,
    
        +0.92%
    
       in a move to generate $2 billion.  
    

    Also read: PacWest sells loan portfolio to Ares Management in deal that generates $2 billion ‘to improve liquidity’
    

    It also sold a portfolio of loans to Kennedy-Wilson Holdings Inc.
    
        KW,
    
        -1.70%    ,
    
       which then sold part of the portfolio to Canada’s Fairfax Financial Holdings Ltd.
    
        FFH,
    
        +1.07%    .
      
    

    Also read: PacWest sparks regional-bank rally after unveiling plan to sell loans worth $2.6 billion
    

    In May, PacWest sold its real-estate lending portfolio to Roc360.
    

    Also in May, PacWest’s stock dropped more than 20% after it said it had lost 9.5% of its deposits amid market volatility.
    

    

    

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