By Alun John, Ankur Banerjee and Manya Saini
SINGAPORE/LONDON (Reuters) -Fear over credit quality in U.S. 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 selloff hit Wall Street’s main indexes, with futures pointing to a weaker open, deepening investor anxiety that was already heightened by escalating U.S.-China trade tensions and renewed worries about the global economic outlook.
The banking sector’s exposure to two recent U.S. 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 U.S. credit markets will have a similar effect, as an overnight selloff 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 U.S. regional banks appeared idiosyncratic rather than a sign of something more systemic.
“Pockets of the U.S. banking sector including regional banks have given the market cause for concern,” said Russ Mould, investment director at AJ Bell.
“This includes Zions flagging an unexpected loss on two loans and Western Alliance alleging a borrower had committed fraud.
FINANCIAL STOCKS HIT GLOBALLY
Some top U.S. banks fell in premarket trading on Friday, capping a week of solid earnings from Wall Street’s top banks on a downbeat note.
Bank of America and Citigroup declined 0.33% and 0.4% each.
“What we see in the banks selling off overnight in the U.S., 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%, with Deutsche Bank and Barclays sliding around 6%, and Societe Generale down 4.6%, after financial firms in Asia, especially Japanese banks and insurers sank.
In pre-market U.S. trading, the SPDR S&P regional banking ETF was up 1%, a day after the benchmark tumbled 6%, its steepest one-day selloff in six months.
Strong earnings from Truist Financial, Regions Financial, and Fifth Third bolstered investor sentiment, sending most U.S. regional banks higher in premarket trading.
Zions Bancorp, at the heart of the investor scrutiny, recovered some lost ground, after closing down 13%. Western Alliance was also up 1.2% in early premarket trade after losing roughly 11% 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 U.S. KBW Regional Banking Index closed down 6.3% on Thursday.
The latest selloff came after Zions said it would take a $50 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, LLC. Attorneys for Cantor denied the allegations.
Such disclosures would not typically impact broader markets, but drew attention as they followed the collapse of two U.S. companies, FirstBrands and Tricolor.
Those failures rattled investors who are worried about risks in private credit, a booming but less regulated market where companies have borrowed heavily in the past few years.
Credit impairments in private debt have been rising and default rates have hit 5.5%, said Mark Dowding, chief investment officer at RBC BlueBay Asset Management, citing the latest available data for the second quarter.
“At the same time, it has also been striking that where credit events have occurred, this has gone hand-in-hand with a weakening of covenants and investor protections, inferring larger losses on default than have historically been the case,” he added.
Still, the gloom spread across other pockets of the 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.
BNPL lenders Affirm and Klarna fell 2.3% and 0.4% respectively, while consumer finance firm SoFi declined 1.3%.
Robinhood and Interactive Brokers fell 2.6% each.
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.”
BROADER MARKET IMPACT
“The market is clearly priced for perfection,” said Bo Pei, analyst at US Tiger Securities. “This leaves sentiment vulnerable, so even isolated negative headlines can trigger outsized reactions like what we saw yesterday.”
European bank shares are up some 40% year-to-date, while world stocks have risen 16%, as investors flocked to companies that might benefit from the AI boom.
Gold meanwhile hit a fresh record high, set for its best week in over 17 years.
“The market has been concerned on a bubble brewing on private credit for the past few months,” said Alan Devlin, Global Financials Research Analyst, Impax Asset Management. “The market is basically shooting first, asking questions later.”
(Reporting by Ankur Banerjee in Singapore and Alun John in London and Manya Saini in Bengaluru. Additional reporting by Kevin Buckland, Stella Qiu, Dhara Ranasinghe, Jose Joel, Pritam Biswas and Medha Singh. Editing by Mark Heinrich, Mark Potter and Nick Zieminski)
