The alleged loan fraud is frustrating but isolated

Western allianceOne regional bank that has been at the center of concerns over loans to non-bank financial players said on Wednesday that it believes the loan that sparked last week’s selling is an isolated case.

The bank reported third-quarter earnings Tuesday afternoon and noted that it had set aside $30 million in reserves for potential losses on a $98 million loan made to Cantor Group. Last week, Western Alliance revealed it had filed a lawsuit against the borrowers behind Cantor Group over alleged fraud related to loan guarantees.

“While very disappointing, we believe this is a one-time issue in our securities financing business and have adjusted our practices for ongoing portfolio monitoring,” Western Alliance CEO Kenneth Vecchione told analysts on Wednesday.

Western Alliance shares were up nearly 2% in midday trading.

Regional banks are getting a reprieve this week after Western Alliance and Zions, which were also hit by alleged loan fraud, reported results that included no new loan failures. Each bank recorded a rise in net interest income due to lower financing costs, while some of its metrics on credit quality actually improved compared to previous quarters.

The Cantor Group incident has forced Western Alliance to review other loans in its securities financing portfolio, Vecchione said on Wednesday.

“Today, we re-verified the ownership rights and privileges of all securities worth more than $10 million and did not find any violations,” he said.

Western Alliance has also been hit by another recent shock: the bankruptcy of auto parts maker First Brands.

But in this case, the loan facility to a fund managed by a subsidiary of investment bank Jefferies “remains in effect, and we continue to receive principal and interest payments as typical,” Vecchione said.

While this week’s reassurances have calmed markets for now, last week’s sharp sell-off in regional markets has left a lasting impact on the industry. Shares of both Western Alliance and Zions fell Thursday after the banks revealed problems with Cantor Group.

Investors are prepared to hit “sell” on any signs that losses are not isolated, and gains for the group’s shares will be limited for the foreseeable future by those concerns, said Timur Braziller, who covers mid-cap banks for Wells Fargo. He cut his ‘sell’ recommendation to Western Alliance on September 29.

“You can’t cancel these events,” Braziller said in an interview. “The timing for any kind of sustained outperformance within the regional groups has been reset again.”