This Week: PacWest Problems, Fed Funds Rate, Key Dates

PacWest’s Problems Are Serious

We of course leave it to those in the arena to draw conclusions about precisely how manageable PacWest’s problems are, and the degree to which that reality is discounted in securities prices. The bank’s problems are indeed serious. As shown in Figure 1, the headline 17% decline in deposits in the first quarter masked a 37% decline in non-interest-bearing deposits. That hole was filled with much more expensive wholesale borrowings and time deposits. Additionally, the first quarter average rate paid on time deposits—3.41%—stands to rise materially. As shown in Figure 2, PacWest is currently offering 4.80% to 5.05% on CDs, and if Fed Funds futures are to be believed, then relief on rates will not come until autumn. All that aside, one needn’t be an especially diligent student of the markets to look at the stock’s collapse this year—and last week’s dividend cut—to recognize there is a severe problem here. 

Figure 1: PacWest Funding Mix Shift, 1Q23

Source: FactSet

PacWest’s problems are significantly less severe than at the recently failed banks, however. With the end of the First Republic saga, the Eye of Sauron immediately fell upon PacWest. Yet while PacWest is a defensible pick for next-most-vulnerable bank, available data suggest that it is significantly less vulnerable—and its problems much more survivable—than those of Silicon Valley, Signature, or First Republic. In the exercise in Figure 1, our coarse math implies a roughly 50% (100bps) rise in funding costs, compared with an increase of over 100% at First Republic. Moreover, PacWest’s management has more levers to work those costs down, not least because of the significant increase in total deposits and borrowings. There is an elevated amount of cash on the balance sheet to be worked down and wholesale funds to be repaid. Looking at the key problem metrics in this crisis, PacWest’s unrealized loss on held-to-maturity securities is a comparatively modest 7.2% of tangible equity, and in terms of uninsured deposits, the damage largely has been done. Uninsured deposits, which were 52% of total deposits at year end, fell to 29% by March 31, and stood at 27% in mid-April.    

Figure 2: PacWest is Currently Advertising High CD Rates on its Website 

Source: pacwest.com

Figure 3: PacWest Short Interest

Source: FactSet

What We’re Watching

Key upcoming data points. Beyond remaining financial sector earnings releases, a few key things we are watching:

Expected sometime this week: 

• The quarterly Senior Loan Officer Opinion Survey (SLOOS), which may offer some additional insight into the effect of the bank crisis on both lending standards and loan demand. 

• FDIC announcement on plan to replenish Deposit Insurance Fund

• California DFPI report on oversight and regulation of Silicon Valley Bank (release date “early May”)

May 8-9: The Gulf South conference, featuring managements from many southeastern banks, and generally well attended by both the buy side and sell side.

May 10: Equitable Holdings’ investor day, which will include Alliance Bernstein CEO Seth Bernstein, and thus may offer read throughs to a range of other financial firms.

May 10, 2pm: House Financial Services Committee Hearing: Federal Responses to Recent Bank Failures. 

May 11, 10am: House Financial Services Committee hearing: Oversight of Silicon Valley Bank and Signature Bank: GAO’s Preliminary Review.

May 11, 10am: FDIC Board meeting: Rulemaking on Special Assessments Pursuant to Systemic Risk Determination.

May 11: Fed H.4.1 release, ICI money market fund assets.

May 12: Fed H.8 release.

May 15: April 10-D filings (master trust data). 

May 22: JP Morgan Chase’s investor day, which promises to offer useful read-throughs across the financial sector, in addition to incremental detail on the First Republic integration.

Interest Rates

Fed Funds futures imply a Summer pause and Autumn easing. As Figures 4 - 6 show, the yield curve remains inverted, but Fed Funds futures imply (as of this writing) that this tightening cycle, the steepest in over 40 years, is over. Futures imply an overwhelming probability of a pause at the June 14 FOMC meeting, with 25bp cuts implied for each of the September, November, December, and January meetings.

Figure 4: The Yield Curve Remains Inverted 

Source: FactSet

Figure 5: Fed Funds Futures Discount a Pause at the June 14 FOMC Meeting 

Source: FactSet

Figure 6: Fed Funds Futures Imply a Summer Pause Followed By Autumn Rate Cuts

Source: FactSet

Weekly Federal Reserve Balances

May 3 Federal Reserve balances show impact of FRC resolution and lower BTFP usage. Figures 7 and 8 highlight the key data points from last week’s release of Federal Reserve balances (Release H.4.1). With the resolution of First Republic, usage of the Discount Window has essentially returned to its pre-crisis level. BTFP usage declined by $5.5 billion, or 7%, but remains close to peak levels.

Figure 7: Federal Reserve Balances

Source: FactSet, Federal Reserve

Figure 8: Bank Term Funding Program Usage Remains Near Peak Levels

Source: FactSet

Money market assets reach new peak. Money market assets grew for the second straight week, rising $47 billion (0.9%). In the week ended May 3. Since March 8, that leaves money market assets up a total of $416 billion (8.5%).

Figure 9: Money Market Fund Assets ($Trillions)

Source: FactSet

Total commercial bank deposits dip. Total deposits dipped slightly in the week ended April 26, rising $21 billion (7bps). Year-over-year, total deposits are down 5%, with half of that decline coming since March 8. While the pace of outflows seems to be reverting to the pre-crisis trend, overall outflows appear likely to continue. Figure 11 shows the industry’s long term loan/deposit ratio. Even with the surge in outflows over the past 2 months, the industry’s loan/deposits ratio remains well below pre-COVID levels, let alone pre-2008/ZIRP levels.

Figure 10: Bank Deposits Declined

Source: FactSet

Figure 11: Total Industry Loan/Deposit Ratio Remains Depressed

Source: FactSet

Total loans grew. Total loans were up $42 billion (34bps) in the week ended April 26, which left them up 62bps 2Q-to-date, which translates to about 8% annualized growth. C&I loans were flat for the week, and up 33bps QTD (4% annualized). Commercial real estate loans were up $14 billion (47bps) for the week, which puts them on pace for roughly 9% annualized growth QTD, which suggests that this uptick was really more statistical noise than evidence of a marked acceleration, but time will tell.

Figure 12: Total Loans Rose Slightly In The Most Recent Week

Source: FactSet

Figure 13: Total Bank Loans by Week ($Trillions)

Source: FactSet

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