(Bloomberg) - Trouble at Zions Bancorp and Western Alliance Bancorp have put US regional banks’ preferred shares in the spotlight on concern the sector is poised for a selloff last seen when Silicon Valley Bank collapsed.
The preferred shares of Zions on Thursday slumped by the most since May 2023 to its lowest in 18 months, while an issue by Western Alliance dropped the most since April 2024. Bid prices signal the securities will fall further on Friday. The lenders said they were the victims of fraud on loans to funds that invest in distressed commercial mortgages, triggering a 10% drop in their stock.
The disclosures by the two banks came at a time when investors were already nervous about the implosion of auto lender Tricolor Holdings and the bankruptcy of auto-parts supplier First Brands Group. Coupled with JPMorgan Chase & Co.’s Chief Executive Officer Jamie Dimon warning of cockroaches in credit, traders have been on alert for bad news, and are opting to sell and ask questions later.
And the selloff in 2023 due to a US regional banking crisis, which began with the failure of SVB and mushroomed to engulf other lenders, is adding to that apprehension.
“These events are one offs,” said Suvi Platerink Kosonen, ING Bank senior financials analyst said in a note Friday. “But they do raise some alarms over the underlying credit quality with massive funds chasing assets with perhaps lighter focus on risk management.”
Zion Bancorp’s 4.819% perpetual preferred securities declined 6.36% to $20.38, and same ranking Western Alliance’s 4.25% securities fell 2.87% to $20.83.
Traders drew a line between preferred stock of the so-called Big 6 money center banks and those from the rest of the market: The large lenders’ issues, both those with a par value of $1,000 and those of $25, were little changed on Thursday, based on data compiled by Bloomberg. By contrast, preferreds issued by smaller banks were hit harder, with those in the so-called retail market of $25 face value losing about 0.7% on average.
The banking crisis in 2023 came after rising interest rates pressured the bond portfolios of SVB and other regional banks as the Federal Reserve raised borrowing costs. SVB was forced to start selling assets at steep losses when depositors began withdrawing money, leading to its collapse. Its demise spiraled to other banks, with panicked investors selling lenders’ shares indiscriminately.
Banks in the US sell preferred stock to raise supplementary capital in a similar way that foreign banks issue more complex Additional Tier 1 bonds.
By Esteban Duarte and Tasos Vossos
