Was The Panic Over Bad Loans That Sent Bank Stocks Reeling Overdone?

Regional bank stocks rose on Friday, rebounding from a sell-off yesterday as investors assessed the fallout from recent bankruptcies and fraud allegations that have raised concerns about lending standards. 

The KBW Regional Banking Index gained 1.7% today after slumping 6% on Thursday, when lenders Zions Bancorp (ZION) and Western Alliance (WAL) revealed they had sued borrowers accused of fraud, amplifying investor anxiety about the health of bank loan portfolios. Zions shares rose nearly 6% today, bouncing back from yesterday’s 13% slide, while Western Alliance shares added 3%.

Concerns about lending practices first surfaced early last month when subprime lender Tricolor declared bankruptcy amid allegations of fraud. The bankruptcy of car parts maker First Brands, which is also accused of misrepresenting its finances, later in the month added to concerns about hidden risk on lenders’ books. Those bankruptcies have affected lenders big and small, including JPMorgan Chase (JPM) and regional lender Fifth Third Bancorp (FITB), both of which took charges of $170 million related to Tricolor.

“We believe the stock reactions today are overdone, given the exposures as a percentage of [tangible common equity] are low,” wrote Jefferies analysts in a note on Thursday. Zions yesterday said its exposure totaled $60 million, about 1% of its available capital, according to Jefferies. Western Alliance said it believed existing collateral would cover its $100 million in affected loans.

Jefferies analysts don’t believe recent turmoil is the canary in the coal mine that some suspect. “While the heightened scrutiny around credit quality is top of mind, our base case frames these as idiosyncratic issues rather than a systemic issue,” the analysts wrote.

JPMorgan CEO Jamie Dimon, on the other hand, warned there could be more turmoil ahead. “I probably shouldn’t say this, but when you see one cockroach, there are probably more,” Dimon said on Tuesday.

Execs ‘Feel Good’ About Non-Bank Exposure

Comments from bank executives in this week’s quarterly earnings reports have also helped to allay some fears. 

“We feel good about our exposures to non-depository financial institutions,” said John Turner, CEO of Regions Financial (RF), referring to the type of financial firm whose dealings with banks have come under scrutiny amid the spate of bankruptcies. Turner said much of Regions’ NDFI exposure is in its REIT portfolio, which “[is] very low leverage and has performed really well.”

“We haven’t been exposed to the headline credits that you’ve seen in the last few days,” said John Ciulla, CEO of Webster Financial (WBS), on Friday morning. “We’re very confident that the underwriting we have in there is extremely solid and we’re not in any sort of other esoteric risk classes,” he added, referring to the firm’s non-bank lending. 

Fed Says Banking System Can Withstand Shock

Lending to NDFIs—firms, sometimes called non-bank financial institutions, that offer financial services like lending and investment management but do not take deposits, and thus aren’t regulated as banks—has grown significantly over the last decade, especially at America’s largest lenders.

NDFI loans from large banks increased by 56% between 2019 and 2024, more than double the rate of total loan growth over that period, according to the Federal Reserve. At the end of 2024, NDFIs owed big banks about $2.3 trillion.

This year, the Fed included in its annual bank stress test an assessment of the risks posed by NDFI lending. The central bank estimated that loan losses at the largest banks would total $490 billion over two years if credit quality deteriorated across their NDFI portfolios. 

While that’s a large loss, the Fed concluded “that large banks are generally well-positioned to withstand significant additional credit and liquidity stresses to major categories of NBFI lending exposures.”