U.S. regional bank stocks faced significant declines on Thursday following Zions Bancorporation’s announcement of a $50 million loss tied to two commercial and industrial (C&I) loans from its California division. This news has deepened investor concerns over potential hidden credit stresses as banks adjust to high interest rates and a volatile economic landscape.
Raymond James analysts remarked that the situation surrounding a significant C&I loan granted to a fraudulent borrower raises questions about Zions’ underwriting standards and risk management practices. The turmoil highlights ongoing worries within the banking sector, which have been exacerbated by the recent bankruptcies of auto parts manufacturer First Brands and subprime lender Tricolor, alongside allegations of fraud. Such developments have intensified scrutiny on banks’ risk management strategies and the complexities of the credit market.
Despite the alarming circumstances, some analysts, including those from KBW, view these incidents as isolated, attributing them to individual borrower’s issues rather than a systemic crisis. David Wagner, from Aptus Capital Advisors, stated that while bankruptcies and fraud do occur, they do not necessarily indicate a broader problem within the banking sector.
Zions Bancorporation’s shares fell by 8.6% during afternoon trading as it anticipated recognizing the losses in the upcoming third-quarter report and has filed a lawsuit in California to recover the affected loans. Brian Mulberry from Zacks Investment Management noted the importance for Zions to demonstrate that this incident is an anomaly rather than a reflection of systemic weaknesses in its credit control.
In a contrasting development, Western Alliance’s stock experienced a slight recovery after announcing a lawsuit against Cantor Group V, LLC, stemming from allegations of fraud. The Phoenix-based bank assured investors that its total criticized assets were lower than reported on June 30, resulting in a decrease of 7.8% in its shares.
The potential for further losses or disclosures related to these incidents could lead to a significant re-rating of the regional banking sector, particularly for weaker institutions, according to Mulberry. As the market grapples with these challenges, the resilience of banks in handling individual crises may be put to the test.