US regional banks' earnings under scrutiny with jitters over credit risks

By Manya Saini (Reuters) -After a turbulent week in which some regional U.S. banks flagged bad loan and fraud issues, investors began scrutinizing the lenders' earnings reports for signs of a wider strain across the sector. However, Zions Bancorporation posted a rise in third-quarter profit on Monday, helped by stronger interest income, despite the $50 million fraud-related charge-off it announced last week. Since the 2023 banking crisis, investors have had little patience for uncertainty, analysts said. Even isolated loan or fraud troubles now trigger broad-based selloffs as traders rush to reduce exposure. "Years of easy credit and low transparency have left investors uncertain about where risks truly lie; even small negative surprises can spark outsized repricing," said Tim Hynes, global head of Credit Research at Debtwire.  The KBW Regional Banking Index has dropped 4.8% this year, lagging the KBW Bank Index, which tracks large-cap banks and is up 15.9% so far in 2025. Last week, bank stocks seesawed sharply after Zions disclosed $50 million in losses tied to two loans and Western Alliance initiated a lawsuit alleging fraud by Cantor Group V, LLC. Cantor has denied the allegations. Zions' third-quarter profit rose despite the charge-off, lifting the bank's shares 2.9% in after-market trading. Zions' losses were related to two commercial and industrial loans from its California division. The SPDR S&P Regional Banking ETF rose 2.49% on Monday. HBT Financial reported results, with non-performing assets at $8.6 million, or 0.17% of total assets, compared with $6.5 million, or 0.13%, in the prior quarter. Its shares rose 4.15% on Monday after it agreed to merge with CNB Bank in a deal valued at $170.2 million. Meanwhile, Jefferies rose 4.25% on Monday, after sharp drops last week. The bank was caught up in the First Brands collapse, though executives have said the investment bank was "defrauded" and any losses are absorbable. Among regional lenders, Washington Trust Bancorp will also report results. The bank had earlier disclosed that its third-quarter profit will be hit by $11.3 million in loan losses. 'ADDITIONAL COCKROACHES'  Even before problems surfaced at Zions and Western Alliance, investor confidence had taken a hit from the twin bankruptcies of auto parts maker First Brands and subprime lender Tricolor. Fifth Third booked a $178 million loss last week tied to the bankruptcy of Tricolor, while JPMorgan Chase wrote off $170 million. "Asset quality metrics across banks have been deteriorating but have held up better than we expected. Losses have been low, so these recent numerous larger loan problems have raised fears of a broader deterioration," said Michael Driscoll, credit rating officer, Global Financial Institutions Ratings at Morningstar DBRS. "But one of the lessons from 2023 regional bank failures was that banks' funding can unravel faster than in the past if sizable issues emerge."  But many including Fifth Third CEO Tim Spence have downplayed comparisons to the 2023 regional banking crisis, when Silicon Valley Bank's failure sparked a broader turmoil. "We view recent weakness in the bank group as being driven by three key reasons," Deutsche Bank analysts said. "These include a number of idiosyncratic credit events occurring over a short period of time, less near-term focus over credit overall and mixed messaging from the banks." Large Wall Street banks last week also described the recent stress as idiosyncratic, but investors worry that problems emerging in quick succession point to deeper cracks in credit quality. "A wave of additional 'cockroaches' could reset risk tolerance across markets, pressuring valuations and tightening financial conditions further," Hynes said.  Analysts said markets have taken note of JPMorgan CEO Jamie Dimon's recent comment about the potential for more cases like First Brands, amplifying investor anxiety about weaknesses in the industry's more opaque corners. "When you see one cockroach, there are probably more, and so everyone should be forewarned of this one," Dimon said last week. (Reporting by Manya Saini in Bengaluru; Additional reporting by Joel Jose; Editing by Arun Koyyur and Richard Chang)

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