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Western AllianceOne of the regional banks at the center of concerns over loans to non-bank financial players said on Wednesday it believes the loan that triggered last week's sell-off was an isolated incident.
The bank reported third-quarter results Tuesday afternoon and said it set aside $30 million in reserves for potential losses on a $98 million loan to Cantor Group. Last week, Western Alliance announced that it had sued the borrowers behind Cantor Group for alleged fraud related to the collateral for the loans.
“While incredibly frustrating, we believe this is a unique issue in our bond financing business and have adjusted our onboarding and ongoing portfolio monitoring practices,” Western Alliance CEO Kenneth Vecchione told analysts on Wednesday.
Shares of Western Alliance rose nearly 2% in midday trading.
Regional banks are getting a reprieve this week after Western Alliance and Zions, which were also implicated in the alleged loan fraud, reported results that included no new loan defaults. Each of the banks reported increasing net interest income due to lower funding costs, while some of their credit quality metrics actually improved compared to previous quarters.
The Cantor Group incident has forced Western Alliance to review other loans in its note financing portfolio, Vecchione said Wednesday.
“Today we re-examined the titles and liens for all notes over $10 million and found no irregularities,” he said.
Analysts asked Vecchione during Wednesday's conference call for more details on the bank's loan collateral and lending to non-depository financial institutions (NDFIs).
“What are you doing to validate your collateral and protect yourself from future scams?” asked Casey Haire, an analyst at Autonomous Research. “As long as you're not afraid of going to jail, it seems easy to double-pledge collateral.”
In addition to the recent review, Western Alliance is regularly reviewing collateral to ensure the bank still has the ability to collect on it if the loan goes sour, executives said. Much of the bank's NDFI book is tied to residential mortgages, which Western Alliance considers to be low risk, they added.
“Can’t be missed”
Western Alliance is also facing another recent blow: the bankruptcy of auto parts maker First Brands.
But in this case, a credit facility granted to a fund managed by an affiliate of investment bank Jefferies “remains current, and we continue to receive principal and interest payments as scheduled,” Vecchione said.
While this week's reassurances have calmed markets for now, last week's sharp selloff in regional equities is leaving a lasting mark on the industry. Shares of Western Alliance and Zions plunged Thursday after the banks disclosed problems with Cantor Group.
Investors are prepared to hit sell if there are signs the losses are not isolated, and the group's stock gains will be limited for the foreseeable future because of those concerns, said Timur Braziler, who covers mid-sized banks for Wells Fargo. On September 29, he shortened his recommendation to the Western Alliance to “sell” it.
“You can’t overlook these events,” Braziler said in an interview. “The timer for any sustained outperformance within the regional group has been reset again.”