To The Moon

The Unresolved Regional Banking Crisis

The U.S. regional banking crisis, a significant concern for the national economy, is far from over. Despite various mitigation efforts, the crisis, triggered by the collapse of several small and medium-sized banks, is poised for another wave. This looming wave is not a cause for panic but a call for prudent financial management and strategic decision-making.

PacWest Bancorp's Financial Struggles

$PacWest(PACW)$ , a major player in the regional banking sector, is currently under the spotlight. The bank's financial health, coupled with the broader challenges facing the regional banking sector, has put significant pressure on its financial performance.

Non-Performing Loans and Risk Exposure

PacWest has been grappling with a high level of non-performing loans, a key indicator of financial distress. Additionally, the bank's exposure to volatile sectors such as real estate and small businesses has increased its risk profile. These factors, combined with the bank's efforts to enhance liquidity and capital conditions, have led to a rollercoaster ride for its share price.

Share Price Volatility and Short Selling Opportunity

Recent reports suggest that PacWest's share price has seen significant fluctuations, with a sharp drop of over 40% followed by a sudden surge of nearly 82%. This volatility, driven by speculative trading, appears to be disconnected from the bank's underlying financial health. This disconnect presents a unique opportunity for investors. Short-selling PacWest's shares at their current high price could yield significant returns if the bank's financial situation worsens, as many financial analysts predict.

Asset Sale and Financial Position

Moreover, recent news indicates that PacWest is selling its subsidiary, Civic Financial Services, which provides loans to landlords and prospective home investors for renovation and resale purposes. This move could be interpreted as an attempt to streamline operations and focus on core banking activities, but it also suggests that the bank is offloading assets to improve its financial position. We also note that PacWest seems to be out of solutions to improve their business, and the only thing they can do is sell their loan business at a loss.

Impact of Rising Interest Rates

Adding to these concerns, the U.S. Federal Reserve is expected to raise its benchmark overnight interest rate by 25 basis points to the 5.25%-5.50% range on July 26, according to a recent Reuters poll. This increase could further strain PacWest's financial situation, as higher interest rates generally lead to increased borrowing costs and can exacerbate the burden of non-performing loans.

PacWest's Upcoming Earnings Report

The holding company for Pacific Western Bank is expected to post quarterly earnings of $0.18 per share in its upcoming report, which represents a year-over-year change of Negative -82.4%. The consensus EPS estimate for the quarter has been revised 59.7% lower over the last 30 days to the current level. PacWest Bancorp's revenues are expected to be $188.3 million, down 47.4% from the year-ago quarter. This still look bad.

Conclusion and Recommendation

Given these circumstances, it is strongly recommended that we short-selling PacWest shares. The bank's financial distress, combined with the ongoing regional banking crisis, the recent asset sale, the impending interest rate hike, and the expected unfavorable second-quarter report, makes a compelling case for this strategy. It is anticipated that the announcement of the Federal Reserve's interest rate hike in July 2023, coupled with the release of PacWest's second quarter report on July 25, 2023, will cause a sharp decline in PacWest's share price. Our target price for PacWest is projected to go down to $4.50 until the Federal Reserve starts reducing interest rates, which looks like it will be 12 to 18 months later.

Target Price: $4.50

Unusual Trading Practices

We have also observed that interest parties are pushing up share prices with large orders almost every day before the market closes. This kind of unusual trading practice is a bad cycle for a banking business and further strengthens the case for short selling.

Risk Management and Informed Decision-Making

However, it's important to note that short selling involves significant risk and should only be undertaken by investors who understand the potential consequences. It's also crucial to stay informed about the ongoing developments in the banking sector and the broader economy. As with all investment decisions, careful analysis and risk management are key.

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@Jerry Ong 

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Disclaimer: The views expressed in this article represent the personal views of myself (the author)and do not constitute investment advice for anyone. The author does not guarantee the accuracy, completeness, and timeliness of the information in the article, nor does it assume responsibility for any losses arising from the use of, or reliance on, the information in the article. The author assumes no fiduciary responsibility or liability for any consequences