Shares of regional bank Jefferies soar as Wall Street worries about loan slump

The bankruptcies of two auto industry companies this year have heightened concerns about lax lending practices, especially in murky private credit markets. As a result, both the banking industry and investors are concerned that failed loans indicate a deepening crisis.

The latest sign of trouble came when Zions announced Wednesday night that it could face a hefty payout for bad debts owed to several borrowers. Although it expected this to be an isolated incident, the bank said it would encourage its lawyers to conduct an independent investigation.

Western Alliance then claimed on Thursday that the borrower had committed fraud. This spooked investors, even though the company said it may reaffirm its guidance and 2025 outlook.

“While we wonder why these credit ‘one-offs’ appear to be occurring over a short period of time, the reality is that even if these exposures are ‘well-contained’ and have ‘limited financial impact,’ the industry tends to encourage investors, especially those new to the sector, to ‘sell first and ask questions later,’ especially when it comes to heightened credit concerns,” JPMorgan banking analyst Anthony Elian wrote in a note Thursday. client.

Concerns about the health of the banking industry stem from the bankruptcies of auto sector companies such as First Brands and Tricolor Holdings.

Auto parts maker First Brands filed for bankruptcy last month and announced this week that founder Patrick James would step down as CEO. The Ohio-based company is facing 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 10% on Thursday. The company’s stock price fell more than 25% in October, on track to record its worst month since the coronavirus pandemic began in March 2020.

Jefferies said the hedge fund it runs has $715 million in debt from companies related to First Brands, while UBS said it has about $500 million in exposure.

“If you see one cockroach, there are probably more.” JP Morgan CEO Jamie Dimon spoke about the impact on First Brands and Tricolor Holdings during an earnings call earlier this week.

JPMorgan had no exposure to First Brands, but took a $170 million write-off from Tricolor last quarter.

“When I asked Jamie Dimon about these issues, he told me that if you see one cockroach, there are probably several more,” said Mike Mayo, senior banking analyst at Wells Fargo. “Investors are looking around for cockroaches. That’s what’s happening now.”

Mayo said credit quality across the industry remains considered good. But he said recent developments show that errors are less likely when problems arise in credit markets.

What’s more, private credit markets are so “opaque” that “there could be a big wave of concern without actually knowing whether there’s a problem or not,” said Peter Cawley of Pave Finance.

This week’s loan revelations represent the latest challenge for local banks in recent years. The industry experienced a crisis in 2023, triggered by the failure of Silicon Valley Bank.

Alternative asset managers and other asset managers also suffered Thursday’s downdraft due to concerns about the health of some loans.

blue owl capital While it fell more than 7%, ares management and black stone They fell more than 6% and 3%, respectively. Apollo Global Management Loss of 5% or more, carlyle group It decreased by about 4%.

To be sure, the big banks’ decline on Thursday was relatively modest. JPMorgan fell more than 2%, while bank of america It decreased by about 3.5%.

This year, a bull run in the stock market and booming private credit markets have soothed investors’ fears of a systemic crisis. The stock market on Thursday seemed to be dragged down by declines in local banks. S&P500 Finish lower.

“I think the risks to the banking space today are unique,” said Timothy Coffey, associate director of deposit research at Janney Montgomery Scott. “Similar to the risks to credit quality from economic downturns, the risks to the insured banking space for private credit could be more systemic.”

—CNBC’s Hugh Song, John Meloy and Scott Schnipper contributed to this report.