Loan fraud allegations are frustrating but isolated

Western Allianceone of the regional banks at the center of concerns over loans to non-bank financial players, said on Wednesday that it believed the loan that triggered last week’s liquidation was an isolated case.

The bank released its third-quarter results Tuesday afternoon and said it had set aside $30 million in reserves for possible losses on a $98 million loan to the Cantor Group. Last week, Western Alliance revealed it had sued Cantor Group borrowers for alleged fraud relating to loan guarantees.

“While incredibly frustrating, we believe this is a one-time issue in our securities financing business and we have adjusted our ongoing portfolio integration and monitoring practices,” Western Alliance CEO Kenneth Vecchione told analysts on Wednesday.

Western Alliance shares were up nearly 2% in midday trading.

Regional banks are getting a reprieve this week after Western Alliance and Zions, which were also exposed in the alleged loan fraud, released results that did not include new loan collapses. Each of the banks recorded an increase in net interest income thanks to lower funding costs, while some of their credit quality indicators actually improved compared to previous quarters.

The Cantor Group episode has forced Western Alliance to review other loans in its securities financing portfolio, Vecchione said Wednesday.

“Today we rechecked the titles and liens for all notes over $10 million and found no irregularities,” he said.

Analysts questioned Vecchione on Wednesday’s call for more details on the bank’s loan guarantees and loans to non-depository financial institutions, or NDFIs.

“What are you doing to validate your warranty and protect yourself against future fraud? » asked Casey Haire, analyst at Autonomous Research. “It seems that as long as you are not afraid of going to prison, it seems easy to double your guarantee.”

In addition to the recent review, Western Alliance periodically reviews collateral to ensure the bank is still able to recover it if the loan goes bad, executives said. A large portion of the bank’s NDFI portfolio is tied to residential mortgages, which Western Alliance considers low risk, they added.

Western Alliance is also exposed to another recent blowout, the bankruptcy of auto parts maker First Brands.

But in this case, a loan facility extended to a fund managed by an affiliate of investment bank Jefferies “remains current, and we continue to receive principal and interest payments as scheduled,” Vecchione said.

Although the assurances given this week have calmed the markets for the moment, the sharp drop in regional prices last week leaves a lasting mark on the industry. Shares of Western Alliance and Zions plunged Thursday after the banks revealed problems with the Cantor Group.

Investors are ready to “sell” as soon as there are signs that the losses are not isolated, and gains on the group’s stocks will be capped in the near future because of these concerns, said Timur Braziler, who covers mid-sized banks for Wells Fargo. He downgraded his recommendation to “sell” the Western Alliance on September 29.

“You can’t ignore these events,” Braziler said in an interview. “The clock for any sort of sustained outperformance within the regional group has been reset once again.”