Regional Bank Showdown: Can Zions and Western Alliance Contain the Credit Fallout?

Regional bank earnings this week will bring a critical stress test for credit sentiment in the sector as Zions Bancorporation (ZION) and Western Alliance Bancorporation (WAL) step to the plate amid fresh concerns tied to bad loans and the recent First Brands bankruptcy . While both lenders insist their credit issues are contained, investors will be listening closely for commentary that either confirms or challenges that view. The twin reports will not only reveal how each bank is managing its exposure but also serve as a bellwether for the broader health of regional balance sheets in a market already uneasy after several high-profile credit events.

The Background: What’s Behind the Jitters The catalyst for last week’s sell-off was a series of loan write-downs tied to questionable borrower behavior—an unwelcome echo of the 2023 regional bank stress. Zions disclosed a $60 million provision and a $50 million charge-off related to fraudulent activity involving borrowers under its California Bank & Trust subsidiary. The loans—originating in 2016 and 2017—were made to two investment vehicles under the “Cantor Group” banner and were supposed to be secured by first-position collateral. Zions later discovered that the collateral was secretly subordinated and, in some cases, stripped away entirely. The bank has filed suit in California, alleging a “sweeping betrayal of trust” and seeking full recovery.

Western Alliance (WAL), which reports earnings on Tuesday, is dealing with a similar borrower. It disclosed a lawsuit against Cantor Group V, citing failure to provide proper first-position collateral and alleging fraud. WAL said the exposure—roughly $98.6 million—is secured by commercial real estate and personal guarantees and emphasized that its total criticized assets are lower than in Q2. The company also reaffirmed its 2025 outlook, underscoring confidence that losses will be limited. Still, with the Zions fraud tied to related Cantor entities, markets have connected the dots, triggering renewed anxiety over whether these exposures might run deeper across the regional space.

The Credit Contagion Question At the heart of the concern is whether these are isolated events or early signs of broader credit deterioration among regional banks with niche lending portfolios. The timing couldn’t be worse: the First Brands bankruptcy, which exposed billions in opaque trade-finance liabilities and caught lenders like Jefferies (JEF) and UBS (UBS) off guard, has already rattled confidence in credit markets. The coincidence of bad loans at Zions and WAL only amplified fears of contagion—fears the banks will now need to address head-on.

Analysts at Wells Fargo note that Zions’ mortgage warehouse disclosure “puts the spotlight directly on WAL’s largest non-depository financial institution (NDFI) category,” which represents 16% of total loans but carries just 0.07% reserves. That’s well below peers, making it a potential flashpoint if losses extend beyond the alleged fraud case. Wells’ takeaway was blunt: WAL’s historically low loan-loss allowance “will be harder to justify.”

Preannouncements and Positioning Ahead of Earnings Both banks attempted to get ahead of the narrative. Zions preannounced the $60 million provision, saying it will be reflected in its Q3 results, while WAL filed an 8-K clarifying that the collateral from its Cantor exposure “covers the obligation” and that the bank’s guidance remains unchanged. Western Alliance also reaffirmed its capital and liquidity position, signaling no material impact to its overall financial condition.

That hasn’t stopped traders from repricing risk. Shares of ZION plunged from $55 to $46 following the disclosure before clawing back to the $51 area, just below the 200-day moving average at $52.29—a technical barrier that will test whether investors view the issue as contained. WAL dropped from $82 to $70, and while it’s bounced modestly to $73, the recovery has been far less convincing. Together, the two names remain the market’s proxy for whether regional bank credit stress is isolated—or the start of something larger.

Understanding the First Brands Link The broader worry stems from the First Brands Group bankruptcy filed in late September, which revealed $10–$50 billion in liabilities and set off a chain reaction across lenders tied to its receivables. Jefferies, through its Point Bonita Capital fund, disclosed $715 million in exposure and a likely $45 million loss, while other creditors—UBS, CIT, Nomura, and SouthState—face hundreds of millions more. The discovery that multiple factoring arrangements may have been layered on the same receivables has raised uncomfortable parallels to the Greensill Capital collapse.

For WAL and Zions, the concern isn’t direct First Brands exposure but rather whether similar underwriting blind spots—especially in trade-finance and warehouse lending—could lead to more surprises. Both institutions have historically carved out niches in specialized commercial lending that can be lucrative but carry elevated fraud and collateral risks when markets tighten.

Market Context and Analyst Tone Despite the headlines, not everyone sees systemic danger. Deutsche Bank argued that the recent weakness in regional bank shares reflects “idiosyncratic events” rather than widespread deterioration. The firm noted that overall credit metrics remain stable, reserves are solid, and capital levels are strong. “While one-off credit issues will likely continue,” Deutsche wrote, “bank earnings thus far don’t support the view that there will be significant stress across portfolios.” The bank specifically cited WAL and Zions as key test cases for sentiment, adding that the recent sell-off “looks overdone.”

Still, with both banks now entangled in litigation and fraud allegations, the optics matter. Analysts expect Zions’ quarterly results to show a clear earnings hit from the charge-off—possibly reducing FY2025 EPS by 5%—even as core operations remain healthy. Western Alliance’s report, meanwhile, will hinge less on the numbers and more on the tone of management commentary around credit exposure, reserve adequacy, and the trajectory of criticized assets.

Investor Sentiment and Technical Setup From a trading perspective, Zions’ chart suggests a market at an inflection point: the sharp drop and partial recovery have created a narrow consolidation band just below resistance. A clean earnings print that confirms the losses are isolated could push the stock above the 200-day average ($52.29), potentially triggering a short-covering rally. WAL, by contrast, remains trapped under its 50-day moving average near $74, and its tepid rebound implies investors need more than reassurance—they need tangible evidence that its credit exposure truly is ring-fenced.

The Broader Implication For regional banks, perception is reality. The sector’s fragility since 2023 has left investors hypersensitive to any sign of weakness. Even isolated loan losses can revive systemic anxiety when they coincide with corporate bankruptcies like First Brands and Tricolor. As Zions and Western Alliance prepare to report, the key takeaway for the market will be whether this was an isolated credit accident or an early warning tremor.

If both management teams can convincingly demonstrate that these incidents are contained and adequately reserved for, the sector could finally exhale. If not—if the tone wavers or new credit concerns emerge—regional banks could once again find themselves back under pressure, just as confidence was starting to rebuild.