Banks and financial stocks rebounded modestly early Friday, showing some signs of stabilization following Thursday's selloff. A slew of different banks of various sizes sank in afternoon trade Thursday over fears that the bankruptcy of auto parts giant First Brands could mark the beginning of a wider crisis in the financial sector.
Amid the bad loan revelations, markets are seeing heightened stress as the Volatility Index (VIX) hits its highest levels since the end of April, Trade Nation analyst David Morrison wrote in a note. U.S. Treasury yields have declined as investors shift to bonds on a flight to safety, all amid ongoing trade tensions, an extended government shutdown and heightened valuations from the AI-driven rally.
Still, the banking sell-off may be overdone, Morrison said. "It's possible that these are all isolated incidents which are completely unconnected, other than the timing of the banks fessing up to them," he wrote. "Then again, a few analysts have been warning about a lack of transparency across private credit and private equity for a while now. So, there's certainly a risk of more bad news to come."
Jefferies Financial Group rebounded 5.5% Friday morning, while Zions Bancorp advanced 3.8%. Western Alliance recovered 2%. The SPDR S&P Regional Banking ETF ticked up less than 1%.
Bank Stocks Fall Thursday
First Brands, primarily known for selling basic car parts like oil filters, brake pads, and windshield wipers, officially filed for bankruptcy last month when investors discovered billions in off-balance-sheet private debt. Among the findings: roughly $2 billion of investors' money couldn't be accounted for. The revelation caused investor confidence to plummet.
With First Brands going belly up after being heavily leveraged in the opaque private-credit market investors now fear there could be more bad loans hidden on banks' balance sheets. Exacerbating those fears were two disclosures from regional banks Zions Bancorporation and Western Alliance that they were exposed to loans issued to allegedly fraudulent investors.
Zions, headquartered in Salt Lake City, announced it would take a $50 million loss in the third quarter on two loans it had issued. While the Phoenix-based Western Alliance filed a lawsuit against a borrower for failing to provide collateral loans.
On Thursday Zions Bancorporation fell 13% and Western Alliance dropped 11%.
The fears spread well beyond just those two banks. SPDR S&P Regional Banking ETF, the ETF that tracks regional banks, sank 6% on the day. Twelve of the fifteen heaviest losses on the S&P Midcap 400 were regional banks.
First Brands, Tricolor Fallout
On the S&P 500, KeyCorp, Citizens Financial Group and Capital One all fell more than 6%.
Jefferies found itself wrapped up in the First Brands bankruptcy due to the fact it had exposure to the embattled auto parts firm across several lines of its business. The Wall Street firm's stock is down 25% over the last month. Jefferies issued roughly $48 million in loans to First Brands. Company leaders said any losses from First Bank could "readily be absorbed," according to a statement released this week.
First Brands ran up a hefty debt over the past half decade or so, acquiring more than 20 companies. The company declared bankruptcy in late September, and is now under federal investigation for its use of off balance-sheet debt.
"We believe there has been an impact on our equity market value and credit perception that is meaningfully overdone, and we expect this to correct soon as the facts and range of outcomes are better understood," Jeffries CEO Rich Handler and president Brian Friedman wrote.
