- Key insight: Regional bank stocks were punished in the markets on Thursday as investors got skittish over credit quality.
- Supporting data: The KBW Nasdaq Regional Banking Index fell some 7% by the late afternoon.
- What’s at stake: Regional banks have been on the path of recovery after turbulence throughout 2022 and 2023.
Regional bank stocks were pummeled on Thursday due to credit quality concerns spurred by several regional lenders’ latest disclosures about alleged borrower fraud.
The KBW Nasdaq Regional Banking Index fell some 7% by the late afternoon after Zions Bancorp. and Western Alliance Bancorp. said they had exposures to fraud-linked losses.
On Thursday, Zions’ stock had plunged some 14%, and Western Alliance’s stock had dropped about 12%.
Jon Arfstrom, associate director of U.S. research at RBC Capital Markets, said during another bank’s earnings call on Thursday afternoon that it was “a bloodbath out there in the bank stocks on credit fears.”
David Chiaverini, an analyst at Jefferies, said in a note that the regional bank stock dives were “overdone, given that the losses as a percentage of total common equity are low” for the banks that reported exposure.
Zions said Wednesday evening that it would take a $60 million credit hit, including a $50 million charge-off, due to what it believes to be “apparent misrepresentations and contractual defaults” by borrowers and “other irregularities with respect to the loans and collateral.”
Zions said that the losses were tied to two borrowers with related commercial and industrial loans extended by its California Bank and Trust division.
In August, Western Alliance sued Cantor Group V LLC on fraud allegations related to commercial real estate loans and their cash proceeds. On Thursday, the Phoenix-based bank said in a securities filing that it believes existing collateral will cover the obligation, and that total criticized assets were lower than they were on June 30. Western Alliance also affirmed its guidance and 2025 outlook.
Banks have generally been chipper about credit quality on their third-quarter earnings calls, which started this week, despite recent instances of fraud that have racked up some losses.
David Smith, an analyst at Truist Securities, wrote in a Wednesday night note that Zions “is clearly not the only bank to step on a rake with credit this quarter.”
“But is it a good thing or a bad thing in credit terms if these loans went bad due to fraud as opposed to the normal course of business?” Smith wrote. “Either way, there have been enough ‘one-offs’ in commercial credits for banks of late that investors are selling first and asking questions later.”
The disclosures by Zions and Western Alliance came just weeks after the collapse of subprime auto lender Tricolor Holdings, which filed for Chapter 7 bankruptcy after allegations of fraud by lenders that financed its operations.
JPMorganChase, Fifth Third Bancorp and even smaller institutions like Origin Bancorp and Triumph Financial announced credit losses ranging from $20 million to $200 million.
JPMorgan CEO Jamie Dimon said Tuesday that while the Tricolor case was a one-off situation, fraud makes his “antenna go up.”
“When you see one cockroach, there are probably more,” he told investors. “So everyone should be forewarned at this point.”