(Adds Zion Bancorporation executives' comments to analysts in paragraphs 2-3, HBT earnings in paragraph 9, Washington Trust earnings in paragraph 12) * Fresh loan losses, fraud cases revive investor worries * Regional bank index lags large-cap * Zions CEO says larger risk of losses lies in private credit By Manya Saini and Pritam Biswas Oct 20 (Reuters) – After a turbulent week in which some regional U.S. banks flagged bad loan and fraud issues, investors scrutinized lenders' earnings reports for signs of wider strain across the sector. Zions Bancorporation posted a third-quarter profit increase on Monday, helped by stronger interest income, despite the $50 million fraud-related charge-off it announced last week. Private credit carries the highest risk of losses, given the high growth rate and light regulation, Zions CEO Harris Simmons told analysts on Monday evening, although he does not expect big bank losses from private credit exposure. 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 commercial and industrial loans and Western Alliance initiated a lawsuit alleging fraud by Cantor Group V, LLC. Cantor has denied the allegations. Zions' higher third-quarter profit , despite the loan losses by its California division, lifted the bank's shares 2.9% in after-market trading. The SPDR S&P Regional Banking ETF rose 2.49% on Monday. HBT Financial reported $19.8 million of net income, slightly higher than in the year-ago quarter, with nonperforming assets at 0.17% of total assets, the same percentage a year earlier. Its shares rose 4.15% after it agreed to merge with CNB Bank in a deal valued at $170.2 million. Jefferies shares rose 4.25% 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's net income was stable at $10.8 million compared to the year-ago period. The bank had warned that its third-quarter profit would 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 Tatiana Bautzer and Joel Jose; Editing by Arun Koyyur and Richard Chang)
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