The tension between Wall Street and Main Street was on display this week as the country’s top banks reported blowout earnings, while regional lenders spooked investors about risks lurking in their loan books.
In a regulatory filing on Thursday, Zions Bancorporation disclosed that it believes there were misrepresentations by certain borrowers who did business with its California Bank & Trust unit. As a result, the lender recorded a $60 million loss provision and a $50 million charge-off in third-quarter results.
In a separate filing on Thursday, Western Alliance Bancorp alleged fraud against a borrower in a lawsuit. But the bank reaffirmed its financial guidance, adding that the disputed revolving credit facility is secured by commercial real estate loans and cash.
Shares of both banks tumbled Thursday, dragging down other lenders along with the broader market, as Wall Street turned fearful about potential threats elsewhere and relived memories of Silicon Valley Bank’s implosion just two years ago.
But analysts said the selloffs were overblown. Raymond James said it views Zions’ disclosure as a “one-off credit hiccup” and not a systemic credit issue.
Still, analysts acknowledged, the “optics” are not great, given how Zions specializes in small commercial and industrial loans but just revealed a large loan to a shady borrower, raising questions about underwriting standards and risk management policies.
Zions will likely share more details when it reports full third-quarter results on Monday.
Similarly, Baird senior research analyst David George said markets were “fighting the last crisis” and echoed the view that the disclosure applies to a unique borrower rather than signaling a systemic risk.
He upgraded the stock to outperform, saying Zions has good underwriting relationships and disciplined loan growth that suggest lower credit risk.
RBC Capital Markets also said Zions is a conservative bank with sufficient loan reserves and capital levels, and called the decline in Western Alliance stock “overdone” since its fraud warning appears to be an isolated issue. But it will still stir some doubts over the quality of the overall loan portfolio.
“Fraud in lending is difficult to detect, but this incident, along with other higher profile suspected frauds in two other credits, leads investors to question overall industry credit quality and underwriting standards,” RBC added.
Western Alliance will release full quarterly results on Tuesday.
The disclosures from the regional banks followed the high-profile bankruptcies of auto-parts supplier First Brands and auto lender Tricolor, which had already put investors on high alert about potential risks in the financial sector.
Those fears contrasted with strong results earlier in the week from Wall Street heavyweights like JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citigroup, and Bank of America.
Earnings got a boost from trading operations and investment banking, which benefited from a resurgence in dealmaking and initial public offerings after an extended drought.
But even JPMorgan was exposed to Tricolor’s collapse and had to book a $170 million charge, with CEO Jamie Dimon admitting that it was “not our finest moment” and that Tricolor is unlikely to be the only troubled lender.
“When you see one cockroach, there are probably more,” he told analysts.
For now, Wall Street has held off on doubling down on its concerns. Shares of Zions and Western Alliance rebounded modestly on Friday.
Capital Economics also pointed out a key difference between now and when Silicon Valley Bank went bust in 2023.
The run on SVB was triggered by losses on Treasury bonds the bank held after the Federal Reserve launched its most aggressive tightening cycle in more than 40 years. But today, Treasuries have been rallying for most of the year as the Fed began sounding dovish and finally resumed rate cuts last month.
Meanwhile, an index of regional bank stocks has been lagging behind the broader market in recent years, suggesting that obvious headwinds for the sector, including weak commercial real estate, have already been priced in, Capital Economics said.
“Given our view that the outlook for bonds and the economy bodes well for banks in general, we think regional banks will ultimately avoid another crisis,” it added.
