US bank stocks are facing a chilling effect as investor confidence wavers, with mounting risks sending shockwaves through the sector. The recent exposure to auto bankruptcies has sparked a wave of unease, causing a sharp decline in stock prices.
The Shaky Foundation of Trust
Zions Bancorporation, Jefferies, and Western Alliance are among the banks feeling the heat. Zions disclosed a $50 million loss on two commercial loans, sending its stock plummeting by 12%. Western Alliance, meanwhile, saw its shares drop by almost 11% after initiating a lawsuit against a borrower for alleged fraud. Jefferies, which held an investor day, experienced a 9% plunge, with its exposure to the bankrupt auto parts maker First Brands raising concerns.
A Web of Unanswered Questions
Jefferies' investor day, closed to the press, left analysts with more questions than answers. Morgan Stanley's Ryan Kenny noted the positive core business outlook but questioned the firm's handling of the First Brands situation and its risk mitigation strategies. Jefferies remained silent, declining to comment on the matter.
The Sell-Off Conundrum
Bank analyst Sean Dunlop from Morningstar Research observed a pattern of investors selling Jefferies' stock first and asking questions later, a move that could soon be considered excessive. The broader market felt the impact, with the regional banking index dropping significantly and the S&P 500 losing nearly 1%.
A Tale of Two Bankruptcies
The collapse of First Brands and the subprime lender Tricolor has drawn parallels with Zions' disclosure. It has exposed gaps in lenders' oversight and raised questions about credit market transparency. JPMorgan Chase CEO Jamie Dimon's comments about anxiety in the credit market following these bankruptcies have added fuel to the fire.
A Test of Transparency
As major global lenders file unsecured claims, the issue has become a critical test of transparency and management in the rapidly expanding private credit market. JPMorgan wrote off $170 million in the third quarter related to the Tricolor bankruptcy, highlighting the need for robust risk controls.
The Legacy of Silicon Valley Bank's Failure
The banks' sell-off comes in the wake of Silicon Valley Bank's 2023 failure, a reminder of the fragility of the financial system in the face of high interest rates and paper losses on bonds. The fatal deposit run that followed, taking down Signature Bank, serves as a cautionary tale.
Spotlight on Risk Controls
The bankruptcies of First Brands and Tricolor have put a spotlight on the risk controls of banks and the opaque credit market. Complex loans and new facilities have made it challenging to gauge participants' exposure, leaving investors and analysts with a sense of unease.
A Call for Vigilance
While some analysts view these collapses as idiosyncratic, tied to individual borrowers rather than systemic issues, the cases are fueling a heightened sense of caution. Banking analyst Mike Mayo from Wells Fargo warns that in times of loose credit, instances of fraud are likely to increase. He emphasizes the need to closely monitor recent developments, even though credit conditions are generally stable.
The situation serves as a reminder of the delicate balance between risk and reward in the banking sector, and the importance of robust risk management practices.
