(Reuters) – Bank stocks in the U.S., including Zion Bank Corp., Jefferies, and Western Alliance, took a hit on Thursday as investors expressed concerns over a sector struggling with the fallout from two recent auto bankruptcies.
Zions experienced a 12% drop after announcing an anticipated $50 million loss in the third quarter tied to two commercial loans from its California branch. Meanwhile, Western Alliance saw its shares slide about 11% following a lawsuit it filed against Cantor Group V, LLC, for alleged fraud. Jefferies, which held an investor day on Thursday, fell 9% as it revealed its exposure to First Brands, an auto parts maker that recently declared bankruptcy, leading to a more than 20% drop in its stock since the announcement.
“This highlights that we can’t take credit quality for granted. Poor credit at one institution can quickly affect others,” noted Stephen Biggar, a banking analyst at Argus Research.
Jefferies’ investor day was off-limits to the press. In a note, Morgan Stanley analyst Ryan Kenney remarked that while the event seemed beneficial for Jefferies’ core operations, there were still many unanswered questions regarding the issues at First Brands and whether Jefferies could have better managed the risks. Jefferies did not respond to requests for comments, and Zions also remained silent regarding inquiries.
“Investors seem to be opting to sell first and ponder questions later with Jefferies, and this selloff could escalate quickly,” Sean Dunlop, a bank analyst at Morningstar Research, mentioned in a note.
The overall market was rattled, with the local bank stock index dropping 5.8% and the S&P 500 down nearly 1%. Analysts pointed out parallels between Zions’ situation and the crash of First Brands, underscoring weaknesses in lender oversight and the need for greater transparency in credit markets.
Comments earlier this week from JPMorgan Chase CEO Jamie Dimon also emphasized the uncertainties in credit markets following the bankruptcies of First Brands and the subprime lender Tricolor. This has created a pivotal test for transparency and control in the developing private credit sector as major financial institutions seek unsecured debt.
JPMorgan accounted for a $170 million write-off in the third quarter due to Tricolor’s bankruptcy and mentioned it was reviewing its management practices. Dimon cautioned, “Everyone needs to be forewarned because even if you see one cockroach, there are probably more.”
The downturn in bank stocks originates more than two years after the Silicon Valley Bank collapse in 2023, which was triggered by elevated interest rates causing paper losses on corporate bonds and eventually leading to the demise of Signature Bank shortly thereafter.
The bankruptcies of First Brands and Tricolor have drawn attention to risk management practices at banks and the complexities of credit markets, which can obscure the true exposure of participants. Zions indicated it anticipates being aware of the charges in the third quarter and has initiated legal actions in California to recover the loan. Western Alliance’s disclosures allege that the defendants breached loan and collateral agreements by misrepresenting title provisions related to some loans.
Western plans to provide details about its diverse business model and “strong credit structure” during its quarterly results announcement scheduled for October 21. Efforts to reach attorneys representing Cantor and the other defendants were unsuccessful. Nevertheless, Western sought to reassure investors by stating that the total criticized assets were lower compared to June 30.
Some analysts contend that the current situation is more of an isolated incident linked to specific borrowers rather than indicative of broader systemic issues; still, it has stirred unease in the market. “In times of low trust, you’re likely to see more fraud,” remarked Mike Mayo, a banking analyst at Wells Fargo. “While there aren’t any widespread credit problems at the moment, there’s an escalating need to monitor recent developments.”
