2023-04-26 11:22:50 ET
Summary
- PacWest Bancorp provided a strong deposit update for the first quarter.
- Deposits kept flowing back to the bank after quarter-end, which is an encouraging sign. Deposit base has fundamentally been de-risked.
- PacWest's book value discount should narrow over time.
PacWest Bancorp ( PACW )'s deposit situation has stabilized towards the end of the first-quarter and showed further signs of improvement after the end of Q1'23. Although PacWest Bancorp has been seriously affected by the deposit flight crisis in March, the situation is fundamentally improving as deposits are flowing back to the U.S. regional bank and PacWest Bancorp saw improved liquidity coverage ratios. I continue to believe that PacWest Bancorp is an attractive recovery bet in the U.S. regional bank market with an asymmetric return profile!
Deposit situation
PacWest Bancorp already gave a liquidity and deposit update -- PacWest Bancorp: The Market Is Wrong -- before the bank released first-quarter earnings on Tuesday and investors should have already understood that the bank’s deposit situation was slowly improving. While PacWest Bancorp was hit hard by deposit withdrawals in the context of the Silicon Valley Bank disaster in March, the situation is not as dire as the bank’s valuation would indicate.
At the end of the first-quarter, PacWest Bancorp had a deposit base of $28.2B compared to total deposits of $33.9B at the end of FY 2022, meaning depositors withdrew 17% of the bank’s funds in the first-quarter. However, the deposit situation has clearly stabilized and I find it highly encouraging that deposits are flowing back to the U.S. regional bank: since the low-point of the financial crisis, which was reached on March 20, 2023, PacWest Bancorp has seen the inflow of $1.8B of new deposits (net) of which $700M flowed to the bank after quarter-end. This means that depositors are comfortable putting their money into accounts held by PacWest Bancorp which should be seen as a sign of confidence.
Uninsured deposits were especially vulnerable to deposit withdrawals due to the FDIC's insurance cap of $250,000 and while PacWest Bancorp has lost $5.7B in deposits in the first-quarter, the bank has also seen a fundamental de-risking of its deposit base: PacWest Bancorp’s insured deposits represented 48% of the bank’s deposit base as of December 31, 2022 and this percentage has risen to 71% as of the end of the first-quarter. The percentage further increased to 73% as of April 24, 2023.
What I find also highly encouraging is that the bank has seen a fundamental improvement in the uninsured deposit liquidity coverage ratio. If all uninsured deposits were withdrawn from PacWest Bancorp at once, the bank could cover, with its currently available liquidity, a total 180% of its uninsured deposit base, making it highly unlikely that the bank would be forced to sell assets to avoid a cash crunch. At the end of FY 2022, PacWest Bancorp had an uninsured deposit coverage ratio of 72%. Since the bank's liquidity situation has fundamentally improved in March, largely due to the Fed making additional liquidity available through its Bank Term Funding Program, PacWest Bancorp's deposit and liquidity risks have decreased significantly.
In summary, I believe the bank's deposit trends are looking much better than the market acknowledges which is why I believe PacWest could see a fundamental re-rating of its common shares in 2023.
PacWest Bancorp’s valuation vs. rivals
PacWest Bancorp’s share price soared 22% after the bell on Tuesday as investors recognized that the deposit and liquidity situation at the bank is much better than previously anticipated. Positive deposit trends are therefore the key reason why I believe that PacWest Bancorp's shares could see a material revaluation to the upside in 2023, chiefly because the discount to book value seems exaggerated in the context of improving deposit trends.
PacWest Bancorp’s book value as of the end of Q1’23 was $18.90, showing a 34% quarter over quarter drop, chiefly because of a $1.38B goodwill impairment which doesn't affect capital ratios. I don’t see any reason why PacWest Bancorp’s shares could not trade at a price-to-book ratio of 1.0X after the crisis in the U.S. regional bank system has been resolved. PACW used to trade at book value pre-crisis and I would expect shares to recover losses in the remainder of the year, if deposit trends continue. Shares currently trade at a 38% discount to Q1'23 book value.
Risks with PacWest Bancorp
The biggest risk for PacWest Bancorp before yesterday’s earnings release was that the bank could be reporting significant deposit outflows in the first-quarter which would likely have added to investors' fears. However, this did not materialize and the bank’s deposit trend is showing that the market is still wrong about applying a steep discount to book value for PacWest Bancorp’s shares.
Final thoughts
The market is still dealing with a major confidence crisis in the U.S. regional bank market, but I believe this fear is misplaced: PacWest Bancorp’s deposit situation is improving and the fact that funds are returning to the bank post-crisis is a strong sign of improving confidence. The steep discount to book value, in my opinion, remains utterly inappropriate giving PacWest Bancorp’s improving fundamentals. Therefore, I see PACW as a high-potential recovery bet in the U.S. regional bank market and I would expect the share price to slowly return to book value!
For further details see:
PacWest Bancorp: A Top Bank Recovery Play For 2023