“Cockroach Hunt” Over? After Loan Portfolio Reviews, U.S. Regional Banks Say: This Isn’t 2023

TradingKey - Recent failures at smaller financial institutions and loan write-offs over the past month have raised fears of a repeat of the 2023 regional banking crisis. However, based on Q3 earnings reports and internal credit portfolio reviews, recent bad debt incidents may not signal systemic risk.

Earlier this month, Zions Bancorp and Western Alliance disclosed significant loan losses tied to fraud in commercial real estate (CRE) funds, sparking concerns about credit quality. The regional bank ETF (KRE) plunged over 6% that day.

Some investors reacted strongly due to lingering trauma from the 2023 banking crisis, when several large regional banks faced deposit runs that rapidly deteriorated their finances. But this time, the damage appears more contained — and banks have stronger buffers.

Banks Reassure: Asset Quality Remains Solid

Kenneth Vecchione, CEO of Western Alliance — one of the banks affected by the loan fraud — said on Wednesday’s (October 22) earnings call:

“We feel comfortable with our asset quality. We think it remains stable from here.”

Similarly, First-Citizens BancShares, which reported an $82 million non-performing loan exposure linked to the bankruptcy of First Brands, acknowledged some issues in its lending portfolio and noted stress among equipment financing clients.

However, it found no broader trends that would trigger widespread credit concerns — and emphasized that its loan loss reserves are sufficient.

Loan Loss Provisions Below Expectations

The loan loss provision is a key metric investors use to gauge banks’ exposure to bad loans. In this quarter, most regional banks reported provisions below consensus estimates, signaling limited fallout.

• Fifth Third Bancorp (impacted by Tricolor bankruptcy):
• • Provision: $197M vs. expected $239M
• Truist Financial:
• • Provision: $436M, down 2.7% YoY vs. expected $485M
• Ally Financial:
• • Provision: $415M vs. expected $455M
• Others like Regions Financial and Huntington Bancshares also reported lower-than-expected provisions

These results suggest that, so far, regional banks are not seeing the kind of widespread deterioration that Jamie Dimon warned of when he said, “If you see one cockroach, there are likely more.”

Not Out of the Woods Yet

While the data is reassuring, it’s too early to declare the crisis over.

Amerant Bancorp, a community bank, has delayed its earnings call to next week, saying it needs more time to complete its review process — raising some investor concern.

Piper Sandler analysts noted:

“Obviously we have no idea on whether this additional time needed to review means a negative development or not, but given the bank’s recent history around credit, it’s hard not to be concerned.”