Alleged loan fraud is frustrating but isolated

Western Alliance, a regional bank that recently made headlines due to concerns over loans made to non-bank financial players, has provided reassurances that the issue is an isolated case. The bank reported third-quarter earnings and disclosed that it had set aside $30 million in reserves for possible losses on a $98 million loan made to the Cantor Group. Last week, Western Alliance sued the borrowers behind the Cantor Group for alleged fraud related to the collateral for the loans.

CEO Kenneth Vecchione stated that they believe this is a one-off issue in their note finance business and have adjusted their onboarding and portfolio monitoring practices. Following this announcement, shares of Western Alliance rose almost 2% in midday trading.

The recent events have prompted Western Alliance to review other loans in its note finance portfolio. Vecchione mentioned that they have reverified titles and liens for all notes greater than $10 million and found no irregularities. Analysts questioned Vecchione during a call for more details on the bank’s loan collateral and lending to non-depository financial institutions.

Apart from the Cantor Group episode, Western Alliance is also exposed to the bankruptcy of the auto parts maker First Brands. However, a loan facility made to a fund managed by a subsidiary of Jefferies remains current, with principal and interest payments being received as expected.

While the reassurances provided by Western Alliance have calmed markets for now, the industry is still reeling from the sharp selloff in regionals last week. Investors are cautious and ready to sell at any signs that the losses may not be isolated incidents. Analyst Timur Braziler, who covers mid-cap banks for Wells Fargo, has downgraded his recommendation on Western Alliance to “sell” following the recent events.

The industry’s share gains will likely be capped in the near future due to these concerns. The events of last week have left a lasting mark on the regional banking sector, and the path to sustainable outperformance has been reset once again. The repercussions of these events will continue to be felt as the industry navigates the aftermath of the loan meltdowns.