Fear over credit quality in US regional banks rippled through markets on Friday, dragging global financial stocks lower and reviving memories of the crisis of confidence that shook sentiment just over two years ago.
The banking sector’s exposure to two recent US auto bankruptcies has rekindled concerns about lending standards more than two years after Silicon Valley Bank’s failure, when high interest rates drove paper losses on its bonds and sparked a global bank stocks rout.
Investors are now trying to assess whether recent issues in US credit markets will have a similar effect, as an overnight sell-off on Wall Street rippled across Asia and Europe and shone a spotlight on the recent AI-led surge in broader stock markets that some fear could have created a bubble.
Some analysts said, at this stage, the concerns around US regional banks appeared idiosyncratic rather than a sign of something more systemic.
“Pockets of the US banking sector including regional banks have given the market cause for concern,” said Russ Mould, investment director at AJ Bell.
Some of the largest US banks fell in Friday trading, closing a week marked by broadly strong earnings on a dour note.
The KBW Banks Index, which tracks large-cap banks, fell 0.4 per cent.
White House economic adviser Kevin Hassett said on Friday that banks have ample reserves and that he was optimistic that credit markets could stay ahead of the curve.
“What we see in the banks selling off overnight in the US, Asia wakes up to it, Europe wakes up to it, and so it spreads,” said TD Securities head of global macro strategy James Rossiter.
European banks fell almost 3 per cent, with Deutsche Bank and Barclays sliding around 6 per cent, and Societe Generale down 4.6 per cent, after financial firms in Asia, especially Japanese banks and insurers sank.
AIB fell more than 3 per cent and Bank of Ireland more than 5 per cent during the session. PTSB lost more than 1 per cent by mid afternoon.
In early US trading, the SPDR S&P regional banking ETF was up 0.4 per cent, a day after the benchmark tumbled 6 per cent, its steepest one-day sell-off in six months. Strong earnings from Truist Financial, Regions Financial, and Fifth Third bolstered investor sentiment, sending most US regional banks higher in morning trading. Zions, at the heart of the investor scrutiny, recovered some lost ground, after closing down 13 per cent. Western Alliance was up 2.6 per cent after losing roughly 11 per cent on Thursday.
“Despite growing hopes of further rate cuts this year, attention is turning to the underlying health of the economy, as emerging credit losses amongst America’s regional banks raised further questions about lending practices,” said Derren Nathan, head of equity research, Hargreaves Lansdown.
The US KBW Regional Banking Index closed down 6.3 per cent on Thursday. The latest sell-off came after Zions said it would take a $50 million (€42.9 million) loss on two commercial and industrial loans from its California unit, while Western Alliance disclosed it had initiated a lawsuit alleging fraud by Cantor Group V. Attorneys for Cantor denied the allegations.
Credit impairments in private debt have been rising and default rates have hit 5.5 per cent, said Mark Dowding, chief investment officer at RBC BlueBay Asset Management, citing the latest available data for the second quarter. Despite tenuous gains in US bank stocks, the gloom spread across other pockets of the US financial sector, weighing on mortgage lenders, buy-now-pay-later firms, and brokerages.
Analysts say that any cracks in credit on Wall Street are likely to spill over into other areas of the financial sector. Robinhood and Interactive Brokers fell 1.5 per cent and 2 per cent, respectively.
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.” – Reuters
