Sopa Images | Light Rocket | Getty Images
western allianceOne of the local banks at the center of concerns about lending to non-bank financial actors said Wednesday that it believes the loans that caused last week’s plunge were a special case.
The bank reported third-quarter earnings Tuesday afternoon and said it had set aside $30 million in reserves for potential losses on a $98 million loan to Cantor Group. Western Alliance announced last week that it was suing Cantar Group borrowers for alleged fraud related to loan collateral.
“While extremely frustrating, we believe this is a one-time issue in our note finance business and have made adjustments to our onboarding and ongoing portfolio monitoring practices,” Western Alliance CEO Kenneth Vecchione told analysts on Wednesday.
Western Alliance stock rose nearly 2% in midday trading.
Regional banks will receive a reprieve this week after Western Alliance and Zions, which also faced loan fraud allegations, reported financial results that did not include new loan meltdowns. Banks recorded increases in net interest income due to lower funding costs, and some credit quality metrics actually improved from the previous quarter.
The Cantor Group case has forced Western Alliance to review other loans in its note finance portfolio, Vecchione said Wednesday.
“Today, we reviewed the ownership and liens on all notes over $10 million and found no fraud,” he said.
Analysts asked Vecchione at Wednesday’s meeting for more details about the bank’s loan collateral and loans to non-depository financial institutions (NDFIs).
“What are you doing to validate your collateral and protect it from future fraud?” asked Autonomous Research analyst Casey Hare. “It seems easy to double-post collateral unless you’re afraid of going to jail.”
In addition to the recent review, Western Alliance regularly tests its collateral to ensure banks are in a position to recover if the loan goes bad, executives said. Much of the bank’s NDFI book is related to home loans, which Western Alliance considers to be low risk, they added.
“I won’t be able to see it.”
Western Alliance is also exposed to another recent explosion, the bankruptcy of auto parts maker First Brands.
But in this case, the loan facility made to a fund managed by a subsidiary of investment bank Jefferies “remains current and we continue to receive principal and interest payments as per our model,” Vecchione said.
While this week’s sense of relief has so far calmed the market, last week’s plunge in local stocks has left a lasting mark on the industry. Shares of Western Alliance and Zions fell sharply on Thursday after the banks disclosed problems with Cantar Group.
Timur Braziler, head of mid-cap banking at Wells Fargo, said investors were prepared to take a “sell” bet on any sign that losses were not isolated, and such concerns would limit any upside in the group’s stock for now. On September 29, he downgraded his recommendation to sell Western Alliance.
“You can’t ignore events like this,” Braziler said in an interview. “The timer for achieving sustainable outperformance within regional groups has been reset once again.”
