An ATM at the Zions Bank headquarters in Salt Lake City, Utah on July 10, 2023.
Kim Raff | Bloomberg | Getty Images
ZION and KRE, 1 day
The bankruptcies of two companies linked to the auto industry this year have raised concerns about lax lending practices, particularly in the opaque private credit market. That leaves the banking industry and investors worried whether the cases of loans gone bad are a sign of a burgeoning crisis.
The latest signs of trouble came when Zions said Wednesday evening that it was facing a significant charge due to questionable loans made to a few borrowers. Although it expected this to be an isolated incident, the bank said it would encourage its lawyers to conduct an independent review.
Western Alliance then claimed Thursday that a borrower had committed fraud. That rattled investors, even though the company said it might reaffirm its 2025 guidance and outlook.
“While we wonder why all of these credit ‘blots’ seem to occur over a short period of time, the reality is that while these exposures may be ‘well contained’ and have ‘limited financial impact,’ this is an industry in which investors – particularly those new to this industry – tend to ‘sell first and ask questions later,’ particularly when it comes to high credit issues,” Anthony wrote Elian, banking analyst at JPMorgan, in a note to clients on Thursday.
Looking for “cockroaches”
Concerns about the health of the banking sector arose from the bankruptcies of companies linked to the automobile sector: First Brands and Tricolor Holdings.
Auto parts maker First Brands filed for bankruptcy last month and announced this week that its founder Patrick James had resigned as chief executive. The Ohio-based company is the subject of a criminal investigation by the Justice Department, the Wall Street Journal reported, citing people familiar with the matter.
Shares of Jefferies, which has exposure to First Brands, fell more than 9% on Thursday. The investment bank’s stock lost around 23% in October, putting it on pace to record its worst month since the Covid pandemic emerged in March 2020.
Jefferies said hedge funds it manages owed $715 million to companies linked to First Brands, while UBS said it had an exposure of about $500 million.
“When you see one cockroach, there are probably others” JPMorgan CEO Jamie Dimon said during the company’s earnings conference call earlier this week about the fallout from First Brands and Tricolor Holdings.
JEF, 1 month
JPMorgan had no exposure to First Brands, but took a $170 million charge last quarter from Tricolor.
“I asked Jamie Dimon about these issues, and you heard that when you see one cockroach, there are probably a few more,” said Mike Mayo, senior banking analyst at Wells Fargo. “Investors are looking for cockroaches. That’s what’s happening.”
An “opaque” market
Mayo said credit quality across the sector is still considered favorable. However, he said recent developments show the small margin for error in the event of hiccups in the credit market.
Additionally, because the private credit market is very “opaque,” there can be a “wave of major concern without really knowing if there is a problem,” said Peter Corey of Pave Finance.
This week’s lending revelations represent the latest challenge in recent years for regional banks. The sector went through a crisis in 2023 that began with the collapse of Silicon Valley Bank.
Alternative asset managers and others also suffered from Thursday’s decline due to concerns about the health of some loans.
Blue Owl Capital fell by almost 4%, while Ares Management And black stone each fell more than 3%. Apollo Global Management weakened by almost 3% and Carlyle Group decreased by more than 2%.
Certainly, the decline of the big banks was moderate on Thursday. JPMorgan only fell about 1%. Bank of America was 2% lower.
A bull market in stocks and a booming private credit market this year have calmed investors’ nerves about the emergence of a systemic crisis. The stock market on Thursday appeared to be dragged down by the decline of regional banks, but stabilized later in the day with the S&P500 seeing only minor losses.
“Today, I think the risk to the banking industry is idiosyncratic,” said Timothy Coffey, associate director of deposit research at Janney Montgomery Scott. “The risk to the insured banking space for private credit could be more systemic, as could the risk to credit quality from a weakening economy.”
— CNBC’s Hugh Son, John Melloy and Scott Schnipper contributed to this report.
