"Cockroaches appear," private credit issues combined with AI concerns cause a 6% plunge in bank stocks.

The US banking sector experienced one of its worst single-day declines this year on Friday, as concerns over AI disruption and private credit risks added pressure, pushing financial stocks into a new wave of selling.

During the trading session on February 27, the KBW Bank Index fell as much as 6%, with all 23 component stocks declining by more than 2.9%. The sector overall retreated to levels seen in early December last year, marking the largest single-day drop since the turbulence in April.

Previously, during the stock market turmoil triggered by AI, investment-grade bonds served as a safe haven. However, according to Bloomberg data, the global comparable investment-grade bond spread has widened by nearly 4 basis points this week, the largest weekly fluctuation since early November last year.

Wall Street Insights mentioned that, from multiple Wall Street institutions, the UK mortgage lender Market Financial Solutions (MFS) declared bankruptcy, and several private credit funds faced liquidity issues, significantly increasing market concerns about default risks in the opaque private lending sector.

Wells Fargo analyst Mike Mayo described this situation in a research report using the metaphor of a “cockroach” once used by JPMorgan CEO Jamie Dimon, warning that the credit cycle has never truly disappeared.

Mike Mayo pointed out in the report that, over the past decade, bank loan growth has consistently lagged behind GDP, implying that greater risks are actually concentrated in the unregulated shadow banking system.

AI Impact Spreads, Financial Sub-sectors Face Sequential Pressure

The current downturn in the financial sector can be traced back to the beginning of this month.

Wall Street Insights noted that stocks related to wealth management within the financial sector were hit first, triggered by Altruist launching a tool that helps financial advisors personalize client strategies, automate payroll, and generate account reports.

Subsequently, an online platform introduced a car insurance comparison app based on OpenAI’s ChatGPT, leading to a sell-off in insurance brokerage stocks.

Last week, Anthropic released a new model specifically designed for automating financial research and legal services, causing the most intense impact on related stocks. Yesterday, Block announced layoffs of nearly half its staff, further fueling market fears that AI will broadly threaten the livelihoods of financial professionals.

Bloomberg industry analyst Herman Chan stated:

Banks are entering a period of higher volatility filled with unknowns, and the pace of AI adoption and disruption remains uncertain. Falling treasury yields combined with widening credit spreads indicate a market shifting towards risk aversion.

Brian Finneran of Truist told clients in a report:

This morning, the market is selling off any assets with even slight ties to credit, with professional investors particularly concerned about American Express, as the trend of white-collar unemployment has a more direct impact on its business.

By the close of US stocks, Zions Bancorp and Goldman Sachs plunged nearly 8%, Wells Fargo, Citigroup, and Morgan Stanley fell more than 6%, while Synchrony Financial, American Express, and Capital One declined at least 5%.

Alternative asset manager Apollo Global Management dropped 9%, while KKR and Ares Management both fell more than 6%.

Private credit concerns emerge, with the “cockroach effect” sparking contagion fears

Alongside AI shocks, multiple risk signals have erupted in the private credit sector.

Wall Street Insights mentioned that just a few months ago, JPMorgan CEO Jamie Dimon warned after a car loan company defaulted, “When you see one cockroach, there may be more,” implying systemic risks in the $1.7 trillion private credit market.

Since the beginning of this month, creditors of MFS have warned that their loans’ collateral faces a $1.3 billion shortfall; BlackRock’s private debt funds sharply cut dividends, causing their stock prices to plummet and dragging down other Business Development Companies (BDCs).

Private credit management firm Invico Capital is working on a plan to handle large investor redemption requests; Blue Owl Capital suspended redemptions for one fund last week and began selling assets to pay investors, with its stock price experiencing a historic decline this month.

According to Bloomberg, the collapse of London-based mortgage lender Market Financial Solutions has affected firms like Apollo Group and Jefferies. Miller Tabak chief market strategist Matt Maley said:

Investors are beginning to worry that this negative sentiment could spread. Even if it doesn’t, the worsening issues in the credit market still pose risks of losses for financial companies.

Risk Warning and Disclaimer

Market risks exist; invest cautiously. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest at your own risk.