Analysts warn regional bank stocks are in a 'negative feedback loop' and detached from fundamentals

Published Thu, May 4 202310:44 AM EDTUpdated Thu, May 4 20234:13 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The latest drop for regional bank shares is causing some Wall Street analysts to back away from their recommendations on the stocks, even if they still believe in the underlying fundamentals for the companies. PacWest Bancorp fell 50% Thursday after reports it is considering a possible sale, which is concerning for investors after First Republic Bank looked for extra financing for weeks before being seized by regulators . Other regional banks also sold off, including a 19% drop for Western Alliance Bank. PacWest confirmed in a press release it is exploring strategic options, but said that it "has not experienced out-of-the-ordinary deposit flows" since the sale of First Republic, adding core deposits have actually increased since the end of the quarter. The deposit update was not enough to reassure Wall Street analysts about the health of regional banks and there is concern the drops in stocks could reignite deposit flight. "We believe that WAL, and the broader regional banking group, are caught in a negative feedback loop driven by steep sell-off in stock prices that are feeding into deposit attrition fears," Bank of America's Ebrahim Poonawala said in a note to clients. D.A. Davidson analyst Gary Tenner downgraded PacWest for similar reasons. "We view PACW as not trading on fundamentals, given market fears, and move to the sidelines, with a neutral rating and $3 PT," Tenner said in a note to clients. PACW 5D mountain PacWest's stock has fallen sharply this week. Meanwhile, RBC Capital Markets' analyst Jon Arfstrom stuck with his outperform rating on PacWest, but said only investors with strong stomachs should stick around. "Risk and volatility tolerance has to be very high in order to be in this stock, but our sense is that the trends from the earnings call, along with the strategic decisions being made at the company, are largely unchanged," Arfstrom said in a note to clients. Janney's Christopher Marinac, however, said that news of a potential strategic move for PacWest was "stale," and reiterated his buy rating on the stock. Western Alliance Bank Another bank stock that has taken heavy losses in recent weeks is Western Alliance Bank . The bank said in a press release Wednesday it has not seen "unusual deposit flows" since the sale of First Republic. The bank added its deposits have risen $1.2 billion since the end of March. WAL YTD mountain The stock has fallen more than 60% since the start of the year. The update "highlights how the fundamentals of the balance sheet were completely de-coupled from any stock related volatility surrounding the FRC resolution," UBS analyst Brody Preston said in a note to clients. Preston kept his buy rating on the stock. Janney analyst Timothy Coffey said in a note to clients Thursday the bank was being "tainted by association" and reiterated a buy rating on the stock. Jefferies and Piper Sandler also kept their positive ratings on the stock. Bank of America's Poonawala, however, moved to no rating on the stock. "We believe that WAL is no longer trading on fundamentals, but rather market fears on whether it could experience additional stress on the funding side, potentially further squeeze profitability," Poonawala said. — CNBC's Michael Bloom contributed reporting.