Smaller banks will have to consider 'open bank deals', consolidation amid banking shakeups: Analyst

Wedbush Securities Managing Director for Equity Research David Chiaverini joins Yahoo Finance Live to discuss the regional banking crisis and the implications for Pacific Western Bank, Western Alliance, and more.

Video transcript

AKIKO FUJITA: Well, Seana, let's get you caught up on our top story today. Investors are keeping an eye on regional banks as fears mount over the US banking crisis. PacWest shares plummeting on Thursday after reports deposits fell over 9% last week.

This comes days after the regional bank claimed it was not experiencing out of the ordinary deposit flows that rocked the other banks. For more on the financial sector, we are joined by David Chiaverini, Managing Director of Equity Research at Wedbush Securities. David, good to talk to you today.

In some ways, it feels like we're starting to see a bit of a differentiation between the regional banks in the eyes of investors. You look at somebody like Western Alliance, who said their deposits actually increase-- their stock is up. To what extent do you think the moves we're seeing today are justified?

DAVID CHIAVERINI: Yes. So I do think that investors are making that distinction. And it's really because Western Alliance, for instance, they saw a very nice increase in their insured deposit level. It's now up to 79%. PacWest, they previously stated that it had gotten up to 75%.

So that should, theoretically, help them. But, clearly, the stock price decline last week really did have an impact and saw that 10% outflows, which, when you look at just their uninsured deposit level, that represented 40% of their uninsured deposit level.

So it does seem like investors are kind of keying in on some of the metrics that are coming out. And it's good to see that Western Alliance is seeing-- catching a little bit of a bid here and not having the same high correlation that they're seeing with PacWest. Now, PacWest, they do have the liquidity.

They've got $15 billion of available liquidity relative to the $5 billion of uninsured deposits. The key issue will be, do we see insured deposits get spooked and leave the bank? Similar to when we look at First Republic, about 10% of First Republic's insured deposits actually left the bank-- and, of course, far more than that on the uninsured deposit side. So it does seem-- I'm not surprised to see the stock take a little bit of a hit after their disclosure of 10% outflows last week.

SEANA SMITH: Yeah, off just about 22% today. David, it's good to see you again. So here we are about two months later here. We've certainly seen jitters remain within the regional banking sector. What do you think this means for consolidation? And what does the timeline look like for this sector?

DAVID CHIAVERINI: Yeah, so I do expect consolidation to occur, although I think that the recent kind of chaos and panic won't lead to consolidation in the here and now. Pretty much the main consolidation we'll see will be the ones that go into receivership. But looking out 12 months, 18 months, I think some of the smaller banks are going to have to look for partners.

And we refer to those banking deals as open bank deals, as opposed to closed bank deals, which is what we've seen of the four that have failed. So the healthy banks today are probably going to hold out and wait for really good deals through receivership before taking the plunge and buying a bank right now. So I do expect an increase looking out 12 to 18 months.

AKIKO FUJITA: So much of this really does come down to confidence. And right now when you look at how these stocks are trading, it really comes down to the big banks versus the regional banks. You talk about potential consolidation. From an investor perspective, does that mean that it's better to put your money behind the big financial names or the big banks in anticipation of what's likely to happen down the line?

DAVID CHIAVERINI: Yeah. It's the old look at risk return. So some of the beaten up, mid-size banks that are likely to survive are at very attractive values here. But at the same time, the big banks are the ones that are showing much better signs of stability, have lower risk. And so you're going to see decent returns, but probably not as big of returns of some of the smaller banks that do survive and see their stock prices appreciate back to a more normalized level.

SEANA SMITH: David, what's your favorite of the smaller banks-- or your favorites?

DAVID CHIAVERINI: Yeah. I would say New York Community Bank, NYCB. That's a good one that they participated in acquiring one of the banks that went into receivership, Signature Bank. They're expecting 20% EPS accretion.

They've already had 20% tangible book value accretion. We also like M&T Bank, Regions Financial, and Fifth Third. Those, we're referring to them as down the fairway type of recommendations. And then one that is higher risk, higher return is Western Alliance.

They've been beaten up pretty severely here. They've kind of turned the tide on their deposit outflows. With them trading at three times our earnings estimate, we think it's an attractive value.

AKIKO FUJITA: Finally, David, Jamie Dimon, who, of course, whose JP Morgan acquired First Republic, weighing in on this discussion about whether, in fact, short selling has really contributed to the kind of volatility we've seen in the regional banks. He says that the SEC should be looking into a potential ban. Based on the data that you have, what's your assessment on the extent of short selling that contributed to the declines that we have seen in regional banks?

DAVID CHIAVERINI: Yeah, my view is that it did contribute. But I would say a lot of long only investors have been bailing out on banks as well. And it really is the banks that have been the most vulnerable that have been targeted here. And I think the long only investors recognize that as well and have been selling.

So I don't think it's just the short selling pressure that's brought down the valuations of these banks. I think it's kind of across the board of investors. And those banks that are showing better stability on an equity-- a tangible book value basis when including the fair value marks, they're the ones that have seen better performance with their stock prices, and then vice versa the ones that are screening poorly are the ones that have been kind of targeted. So it has contributed, for sure, in certain situations. But I don't think it's the sole reason that bank stocks have come under pressure.

AKIKO FUJITA: David Chiaverini, appreciate you joining us today. Really good to hear your takes.