Shares in regional banks and investment bank Jefferies plummeted on Thursday as anxieties grew regarding potentially problematic loans on Wall Street.
Zions Bancorporation fell more than 13%, while Western Alliance Bancorp dropped over 10%. The SPDR S&P Regional Banking ETF (KRE) lost upwards of 6%, with nearly all constituents of the notable fund concluding Thursday’s trading session in the negative.
The failures of two automotive-related firms this year have surged worries regarding lenient lending habits, particularly within the obscure private credit sector. This has left both the banking sector and investors anxious about whether cases of mismanaged loans suggest an impending crisis.
The most recent hint of complications surfaced when Zions disclosed on Wednesday evening that it faced a significant charge due to bad debts from a couple of borrowers. Although anticipating this was an isolated event, the bank indicated it would prompt its counsel to conduct a separate review.
Western Alliance subsequently claimed on Thursday that a borrower engaged in fraudulent activities. This unsettled investors despite the firm asserting it could uphold its guidance and projections for 2025.
“While we are questioning the rationale behind these credit ‘one-offs’ seemingly happening in rapid succession, the fact remains that although these risks may be ‘well-contained’ and have a ‘limited fiscal effect,’ this is an industry where investors — particularly those new to this field — typically ‘sell first and ask questions later,’ particularly during times of heightened credit concerns,” wrote JPMorgan banking analyst Anthony Elian in a Thursday note to clients.
Searching for ‘cockroaches’
The concerns regarding the banking industry’s well-being stemmed from the bankruptcies of enterprises connected to the automotive industry: First Brands and Tricolor Holdings.
Auto parts manufacturer First Brands declared bankruptcy last month and revealed this week that founder Patrick James resigned as CEO. The firm based in Ohio is currently under a criminal investigation by the Justice Department, as reported by the Wall Street Journal citing sources familiar with the issue.
Shares of Jefferies, which has ties to First Brands, declined by more than 10% on Thursday. The investment bank’s stock has plummeted over 25% in October, positioning it for its worst month since the onset of the Covid pandemic in March 2020.
Jefferies mentioned that hedge funds it manages are owed $715 million from entities linked to First Brands, while UBS reported about $500 million in exposure.
“When you observe one cockroach, there are likely others,” JPMorgan CEO Jamie Dimon stated during the company’s earnings conference call earlier this week regarding the aftermath of First Brands and Tricolor Holdings.
JPMorgan did not have links to First Brands but did record a $170 million charge-off last quarter due to Tricolor.
“I posed the question to Jamie Dimon about these issues, and you heard, when you see one cockroach, there are probably several more,” stated Mike Mayo, senior banking analyst at Wells Fargo. “Investors are scanning for cockroaches. That’s the situation.”
A ‘murky’ market
Mayo indicated that credit quality in the broader industry remains surprisingly good. However, he expressed that the recent occurrences highlight the slim margin for error when credit markets face disruptions.
Moreover, due to the private credit market’s “murky” nature, significant waves of concern can arise without truly understanding if a problem even exists, mentioned Peter Corey of Pave Finance.
This week’s lending revelations represent the latest obstacle in recent years for regional banks. The sector experienced a crisis in 2023 that initiated with the collapse of Silicon Valley Bank.
Alternative and other asset managers also faced declines resulting from worries regarding the state of certain loans.
Blue Owl Capital plunged more than 7%, while Ares Management and Blackstone saw drops exceeding 6% and 3%, respectively. Apollo Global Management experienced a decline of over 5% and Carlyle Group dropped around 4%.
It should be noted that the declines in major banking institutions were comparatively mild on Thursday. JPMorgan decreased by more than 2%, while Bank of America fell approximately 3.5%.
A bullish environment for stocks and the thriving private credit market this year has assuaged investor worries about the potential emergence of a systemic crisis. On Thursday, the stock market appeared to be pulled down by the decline in regional banks, resulting in the S&P 500 finishing lower.
“Today, I would argue that the risks facing the banking sector are specific to individual cases,” stated Timothy Coffey, associate director of depository research at Janney Montgomery Scott. “The risks to the insured bank segment for private credit could be more widespread, as well as the threat to credit quality arising from an economic downturn.”
— CNBC’s Hugh Son, John Melloy, and Scott Schnipper assisted in this report.
