Regional Banks Face Turbulence Amid Bad Loan Concerns

SALT LAKE CITY, Utah — Shares of regional banks experienced significant declines on Thursday as investors reacted to fears regarding problematic loans in the market. Stocks like Zions Bank and Western Alliance dropped more than 10% during midday trading, contributing to worries about the broader banking sector.

The market’s concerns were exacerbated by the bankruptcies of two automotive industry-related companies earlier this year, which had raised alarms about loose lending practices. Analysts warn that the opaque nature of the private credit market could conceal additional troubles for banks.

Zions announced on Wednesday that it faced a sizable charge due to bad loans to a couple of borrowers. The bank believes this situation may be isolated, but it has pledged to have an independent review to address the matter.

Western Alliance, another regional bank, reported on Thursday that one of its borrowers had committed fraud, intensifying anxiety among investors. Despite this, the bank reassured stakeholders that it expects to maintain its guidance for 2025.

“While we question why these credit issues are surging within a short timeframe, investors in this sector often react quickly, selling shares amid credit concerns,” noted JPMorgan analyst Anthony Elian in a client note.

The anxiety surrounding bank health first arose following the bankruptcies of First Brands and Tricolor Holdings, companies tied to the auto sector. Shares of Jefferies, an investment bank with exposure to First Brands, fell over 9% on Thursday, losing about 23% for the month—its worst showing since the onset of the COVID-19 pandemic.

Jefferies reported that hedge funds associated with it are owed $715 million from companies related to First Brands. Meanwhile, UBS indicated it has approximately $500 million at stake due to similar exposures.

Analyst Mike Mayo from Wells Fargo highlighted the sentiment among investors, likening the search for potential issues to noticing the presence of a cockroach: “When you see one, there are probably more.” He emphasized that overall credit quality remains strong, but recent developments illustrate the narrow margin for error amid fluctuating credit markets.

The private credit space’s ambiguity means that concerns can arise without clear evidence of problems. Peter Corey of Pave Finance remarked on the potential for unwarranted panic based on limited information.

This week’s loan issues reflect the ongoing challenges faced by regional banks, which have dealt with a tumultuous industry landscape in recent years. Many banks, including Alternative asset managers, saw their stock prices drop on Thursday, with declines of 2% to nearly 4%.

Major banks overall fared better, with minimal decreases, as some analysts believe the risks to these larger institutions may be more isolated compared to those stemming from private credit concerns. Timothy Coffey of Janney Montgomery Scott noted that while risks exist, they are likely not indicative of a systemic crisis.