US bank stocks are shaking as investors worry about rising risks

By Manya Saini, Arasu Kannagi Basil and Ateev Bhandari

(Reuters) -U.S. bank stocks including Zions Bancorporation, Jefferies and Western Alliance fell sharply on Thursday as investors grew concerned about risks in the sector, which has been shaken by exposure to two auto bankruptcies.

Zions fell 12% after announcing it would suffer a $50 million loss in the third quarter on two commercial and industrial loans from its California division. Shares of Western Alliance fell nearly 11% after the bank separately announced it had filed a lawsuit alleging fraud by Cantor Group V, LLC. Investment bank Jefferies, which held an investor day on Thursday, fell 9%. The company has disclosed its exposure to bankrupt auto parts maker First Brands and its shares have fallen by more than a fifth since First Brands' bankruptcy announcement.

“It shows that you can't take credit quality for granted, and underperforming credit quality at one bank can drag down the group quite quickly,” said Stephen Biggar, banking analyst at Argus Research.

JEFFERIES LEAVES 'QUESTIONS UNANSWERED'

Jefferies' investor day was closed to the press. Morgan Stanley analyst Ryan Kenny said in a note that Jefferies' investor day was positive on its core business, “but left some questions unanswered about what exactly went wrong with First Brands and whether or not JEF could have mitigated the risk in advance.”

Jefferies did not respond to a Reuters request for comment. Zions did not respond to a request for comment.

“It appears investors are opting to sell first and ask questions later on Jefferies, a selloff that quickly risks becoming overdone,” Sean Dunlop, banking analyst at Morningstar Research, said in a note.

The situation shook the broader market, with the regional banking index falling 5.8% and the S&P 500 losing almost 1%.

Wall Street analysts drew parallels from Zions' revelation to the collapse of auto parts maker First Brands, which exposed holes in lender oversight and raised questions about lending market transparency.

Brokers pointed to comments from JPMorgan Chase CEO Jamie Dimon this week about the credit market turmoil following the bankruptcies of First Brands and subprime lender Tricolor.

With major global lenders filing unsecured claims, the issue has become a key test for transparency and governance in the fast-growing private lending market.

JPMorgan wrote down $170 million in the third quarter related to Tricolor's bankruptcy and said it was reviewing controls.

“If you see one cockroach, there are probably more, and so everyone should be warned,” Dimon said.

The bank sell-off comes more than two years after Silicon Valley Bank's 2023 default, when high interest rates caused paper losses on its bonds, leading to a fatal deposit run that felled Signature Bank just days later.

FIRST BRANDS, TRICOLOR PUT RISK MANAGEMENT IN THE SPOT

The bankruptcies of First Brands and Tricolor have put a spotlight on banks' risk management and the opaque credit market, where complex lending and new facilities have made it more difficult to assess participants' exposure.

Zions expects to acknowledge the charges in the third quarter and has filed a lawsuit in California to recover the loans.

Western's disclosure stated that the defendants breached a business loan and security agreement by falsifying property policies regarding the lien – a legal claim – on property underlying various loans.

The August lawsuit revealed that Cantor was a company doing business in Los Angeles County, California.

Western will provide context on its diversified business model and “strong credit structures” when it reports quarterly results on Oct. 21, the bank said in an email.

Attorneys for Cantor and other defendants could not immediately be reached for comment.

Western has tried to reassure investors by saying that the total number of criticized assets – credits identified as weak – were lower than at June 30.

Some analysts still view the collapses as idiosyncratic and tied to individual borrowers, rather than systemic. But the cases are causing unrest.

“In times of loose credit, you're going to see more cases of fraud,” said Mike Mayo, banking analyst at Wells Fargo. “Right now, lending is generally fine, but there is a greater need to monitor recent issues.”

(Reporting by Manya Saini, Arasu Kannagi Basil and Ateev Bhandari in Bengaluru and Saeed Azhar and Anirban Sen in New York; Editing by Lananh Nguyen, Megan Davies, Rod Nickel)