The markets have weathered a string of credit scares and surprise write-downs over the past two years
[NEW YORK/LONDON/SINGAPORE] A clutch of bad loans at banks in recent weeks has shaken investor confidence in banking shares, which gyrated sharply late this week as unease mounted over credit risks that threatened to spill into the broader markets.
The markets have weathered a string of credit scares and surprise write-downs over the past two years, but sentiment took a particularly hard knock in recent days from auto bankruptcies and alleged fraud that resulted in losses at several banks.
The latest scare came on Thursday (Oct 16) when Zions Bancorporation disclosed losses tied to two commercial and industrial loans and Western Alliance said it had initiated a lawsuit alleging fraud by Cantor Group V, LLC. Cantor denies the allegations.
Variety of issues fuel credit concerns
“Markets have been gripped by a sense of fear and panic in the last couple of days,” said Timothy Coffey, associate director of depository research at Janney Montgomery Scott.
“There are different issues that are being conflated into one big issue about credit concerns.”
Pressure on bank stocks “is likely to continue, this panic is like a fever. Once it enters the system, it takes a while to leave”, Coffey said.
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The banking sector’s exposure to two recent US auto bankruptcies, at First Brands and Tricolor, has also rekindled concerns about lending standards more than two years after Silicon Valley Bank’s failure triggered broader turmoil.
“In the post-SVB world, regulators have been asking banks about their commercial real estate exposure, the percentage of their uninsured deposits, deposit strategy, how they are set up at the discount window, and those conversations have not changed,” said Dan Hartman, a lawyer at Nutter.
Still, many played down any parallels with the regional banking crisis in 2023, which was marked by the failure of several mid-sized banks, including Silicon Valley Bank.
“I would not equate what happened this week to the 2023 banking crisis,” said Fifth Third CEO Tim Spence. He said investors now were reacting to losses they did not understand well, but he expected shares would recover as more information is released.
US bank stocks claw back losses
US bank stocks indeed rebounded on Friday, clawing back some of the steep losses the day before when fears over bad loans triggered a global sell-off that swept through European and Asian markets.
The rebound helped the main US equities indexes finish higher in choppy trading, even as investors stayed on edge about banks. Their anxiety had already been stirred by escalating US-China trade tensions and the global economic outlook.
The US KBW Regional Banking Index, which closed down 6.3 per cent on Thursday, ended Friday up 1.7 per cent. An index tracking large-cap rivals finished up 0.6 per cent after falling 3.6 per cent the day before.
In the European markets, banks fell almost 3 per cent, with Deutsche Bank and Barclays sliding around 6 per cent. Financial firms in Asia, especially Japanese banks and insurers, also took a hit.
Options market activity on Friday was mixed, as Thursday’s initial defensive trading shifted towards modest positioning for a sector rebound. “While there’s clear hedging tied to fears of credit deterioration and broader contagion, it’s not yet a full-blown systemic panic – it’s an increase in concern and uncertainty,” said Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group.
Investors are also assessing whether recent strains in US credit markets could affect AI-fuelled valuations across markets.
JPMorgan Chase CEO Jamie Dimon said earlier this week about credit markets: “When you see one cockroach, there are probably more, and so everyone should be forewarned.”
Investors encouraged by strong earnings
White House economic adviser Kevin Hassett said on Friday that banks have ample reserves and that he was optimistic credit markets could stay ahead of the curve.
He added in an interview with Fox Business Network that Trump administration officials led by Treasury Secretary Scott Bessent and the Federal Reserve’s Michelle Bowman are “cleaning things up right now”, but gave no further details.
Strong earnings from Truist Financial, Regions Financial and Fifth Third on Friday bolstered investor sentiment, sending most US regional banks higher on Friday.
“The few recent corporate bankruptcies appear to be isolated cases, with the raft of bank earnings reports this week actually noting overall improving credit quality in the third quarter,” said Stephen Biggar, director of financial research at Argus Research.
Zions Bancorp rose 5.8 per cent on Friday, after closing down 13 per cent the day before. Western Alliance climbed 3.1 per cent after losing roughly 11 per cent on Thursday. Jefferies shares jumped 5.9 per cent following a steep drop in the previous session.
Some investors were encouraged by the emerging earnings picture. “It seems like, despite some of the risks, right, the consumer is muddling through for now, and the market will probably eventually look through that,” Rob Haworth, senior investment strategist at US Bank Wealth Management in Seattle. “But we’ve got to clear some of these worry factors in the near term.” REUTERS
