“We feel comfortable with our asset quality. We think it remains stable from here,” Western Alliance Bancorp Chief Executive Officer Kenneth Vecchione said on an analyst call on Wednesday.
Shares of regional lenders have steadied since losing $100 billion of market value in a single day earlier this month as news about bad loans unfurled. At that time, investors were spooked by alleged fraud associated with a borrower group in commercial real estate that affected both Western Alliance and Zions Bancorp, two roughly $90 billion regional banks large enough to matter to the system. The bankruptcies of Tricolor Holdings and First Brands Group added to the negative tone.
Investors have been jittery in part because of scars from the 2023 banking crisis, when several large regional lenders suffered deposit runs that quickly eroded their financial health, said Gregory Lyons, a corporate partner at Debevoise & Plimpton. The issues this time are much more limited and cushioned by reserve buffers, he said.
No Drumbeat
“You didn’t have the drumbeat that you had in 2023,” Lyons said in an interview. “I also think there is fundamentally an underlying confidence in the sector that didn’t exist in 2023.”
Unlike deposit runs that can unfold overnight, credit hits don’t often threaten banks’ financial health immediately because they hold cushions of reserves. Banks ideally have ample time and room on balance sheets to cope with the damage.
First-Citizens BancShares Inc., a regional lender based in Raleigh, North Carolina, saw a few bad loans in the quarter that made its earnings numbers lumpy, including a $82 million charge-off as a result of the bankruptcy of auto-parts maker First Brands. It also sees stress among customers in equipment finance, although with signs of improvement, said Chief Financial Officer Craig Nix.
“While we continue to monitor these portfolios, we don’t see further trends that would signal wider credit quality concerns and believe we are well-reserved,” Nix said on an investor call on Thursday.
Beating Estimates
Profits of Western Alliance and Zions in the third quarter also came in better than analysts’ expectations despite the hiccups. As for future results, the recent setbacks have prompted several banks to do a fresh round of reviews of their loan portfolios to identity any similar issues.
Fifth Third Bancorp, which faced as much as $200 million in charge-offs due to its connection with the collapsed subprime auto lender Tricolor Holdings, conducted a “house-to-house search” through its loan collateral for other discrepancies, and found only two more issues out of 120,000 vehicles, the bank’s chief credit officer, Greg Schroeck, said on an earnings call last week.
That’s not to say the banking industry has wiped its slate clean of credit risks. Pressure continues to build across the economy, with persistent inflation squeezing low-income consumers and tariff negotiations adding uncertainty at every stage of the supply chain.
Amerant Bancorp, a $10 billion community bank in Florida, pushed back its earnings call to next week, saying it needed more time to “complete its customer-review process.” It sparked concerns around possible credit issues, and the shares dropped by more than 4% on Thursday.
“Obviously we have no idea on whether this additional time needed to review means a negative development or not, but given the bank’s recent history around credit, it’s hard not to be concerned,” Piper Sandler & Co. analyst Stephen Scouten wrote in a note on Wednesday.
— By Yizhu Wang (Bloomberg)
