Concerns for U.S. Regional Banks Rise

(Bloomberg) — Troubles at Zions Bancorp and Western Alliance Bancorp have drawn attention to the preferred stocks of regional banks in the U.S., as investors grow cautious about lenders’ credit loss reserves.

Zions Bancorp’s preferred stock saw a significant decline on Thursday, hitting its lowest point in 18 months, while stocks from Western Alliance experienced their steepest drop since April 2024. However, some of these losses were recouped on Friday morning amid a broader market uptick.

The stock market saw a modest rise on Friday, bolstered by solid financial results from Trust Financial, Regions Financial, and Fifth Third Bancorp. Yet, the announcement from Zions and Western Alliance about being victims of fraud related to loans for distressed commercial mortgages pushed their common shares down by more than 10%.

This came as investors were already on edge due to the recent collapse of auto finance company Tricolor Holdings and the bankruptcy of auto parts supplier First Brands Group. With JPMorgan Chase CEO Jamie Dimon’s remarks about potential credit issues still fresh, traders are anxious and often choose to sell before assessing the situation.

Additionally, soaring valuations following a prolonged rally are adding to the unease.

“We’ve been advising investors not to chase the last few basis points of performance,” remarked Spencer Poore, a senior credit analyst at Piper Sandler Credit Trading. “A prolonged bear market could provide a chance to reevaluate high-quality companies on a broader scale.”

Zions Bancorp’s 4.819% perpetual preferred securities rose by 3.8% to approximately $21.15 on Friday morning after a notable drop of 6.36% to $20.38 on Thursday. Meanwhile, the Western Alliance 4.25% securities decreased by 2.87% to $20.83 on Thursday, but bounced back by 1.7% to $21.19 in early Friday trading.

Traders differentiated between the preferred stocks of larger money center banks and those from other financial institutions. As of Thursday, the issuance by major banks remained stable, both in $1,000 and $25 denominations, while senior debt from smaller banks faced more severe impacts, with retail market senior debt at $25 declining by an average of about 0.7%.

The 2023 banking crisis erupted as rising interest rates strained the bond portfolios of SVB and other regional banks. SVB’s bankruptcy triggered a wave of withdrawals, forcing it to sell assets at substantial losses, which ultimately affected several other banks.

U.S. banks typically raise additional capital by issuing preferred stock, similar to how foreign banks manage more complex additional Tier 1 bonds.

“These incidents are isolated,” noted Svi Platerink Kosonen, a senior financial analyst at ING Bank, in a note on Friday. “Still, there are warning signs regarding underlying credit quality as substantial funds pursue assets, perhaps overlooking risk management.”