PacWest's Strong Core Profitability Overshadowed By Credit Concerns

It’s early in the third quarter reporting cycle, but LA’s PacWest Bancorp (PACW) is not standing out in a good way. Weaker revenue on greater spread pressure is not a surprise, but credit quality remains a real concern, as PacWest has above-average exposure to sectors under greater strain from COVID-19.

When I last wrote about PacWest, in the days before COVID-19, I was concerned about the bank’s ability to profitably grow loans, and the risk that this would be/become a “value trap”. Since then, the dividend has been cut, credit quality looms as a larger threat, and the shares have declined about 50% - far worse than regional bank peers.

PacWest is a more challenging stock call now. On one hand, this is a very profitable bank with a fairly healthy capital situation. On the other hand, while I do think reserves are adequate, I am nevertheless concerned about the risk of increasing credit strain in the CRE portfolio, as well as a more prolonged hit to loan demand. With a fair value in the mid-$20’s, this name looks a lot more interesting now, but investors should be aware of the above-average risk that goes with that appreciation potential.

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PacWest's Strong Core Profitability Overshadowed By Credit Concerns