"‘Cockroaches appearing’: Private credit issues combined with concerns about AI trigger a 6% plunge in bank stock indices."

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On Friday, U.S. bank stocks suffered one of their worst single-day declines this year, as pressure from concerns over AI disruption and private credit risks pushed financial stocks into a new round of selloffs.

During trading on February 27, the KBW Bank Index at one point fell by 6%. All 23 constituent stocks dropped, each by more than 2.9%. The sector as a whole retreated to the level of early December last year, marking the biggest one-day drop since the market turmoil in April.

Previously, during stock market turmoil driven by AI, the investment-grade bond market had played the role of a safe haven. But according to Bloomberg data, the global comparable investment-grade bond spread has widened by nearly 4 basis points this week, the biggest one-week swing since early November last year.

WallStreetCN mentioned that UK mortgage lender Market Financial Solutions (MFS), financed by multiple Wall Street institutions, declared bankruptcy, and several private credit funds have experienced liquidity issues, causing market concerns over default risks in the opaque private lending sector to surge sharply.

Wells Fargo analyst Mike Mayo used JPMorgan CEO Jamie Dimon's “cockroach” metaphor in his report to describe the situation, warning that the credit cycle has never truly gone away.

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

AI Shock Spreads, Financial Subsectors Hit in Turn

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

WallStreetCN mentioned that wealth management-related stocks in the financial sector were the first to take a hit, triggered by Altruist launching a tool that helps financial advisors personalize client strategies and automatically generate payroll and account reports.

Subsequently, an online platform launched a car insurance comparison application based on OpenAI's ChatGPT, leading to a selloff in insurance brokerage stocks.

Last week, Anthropic released a new model specifically for automating financial research and legal services, dealing a severe blow to related stocks. Yesterday, Block announced layoffs of nearly half its employees, further stoking market fears that AI will broadly threaten the livelihoods of financial industry workers.

Bloomberg Industry Research analyst Herman Chan said:

Banks are entering a period of higher volatility full of unknowns, and the pace of AI adoption and disruption is still hard to judge. Falling treasury yields along with widening credit spreads show that the market as a whole is turning risk-averse.

Brian Finneran of Truist noted in a client report:

The market this morning is selling off any target remotely related to credit. Professional investors are particularly focused on American Express, as the white-collar unemployment trend has a more direct impact on its business.

By the close of the U.S. stock market, Zions Bancorp and Goldman Sachs had both slumped nearly 8%, Wells Fargo, Citigroup, and Morgan Stanley all dropped more than 6%, and Synchrony Financial, American Express, and Capital One each fell by at least 5%.

Alternative asset management firm Apollo Global Management plummeted 9%, while KKR and Ares Management both lost more than 6%.

Private Credit Worries Emerge, 'Cockroach Effect' Fuels Contagion Fears

Parallel to the impact of AI are multiple risk signals erupting in the private credit sector.

WallStreetCN mentioned that just a few months ago, JPMorgan CEO Jamie Dimon warned after a car loan company blew up that “if you see one cockroach, there may be more,” hinting at systemic risk in the $1.7 trillion private credit market.

This month, MFS's creditors warned of a $1.3 billion shortfall in loan collateral; BlackRock's private debt fund greatly cut its dividend, sending its stock price tumbling and dragging down other Business Development Companies (BDC) stocks.

Private credit manager Invico Capital is working on a plan to deal with large redemption requests from one of its funds; last week, Blue Owl Capital suspended redemptions on a fund and began selling some assets to pay investors, with its stock’s decline this month setting a record.

According to Bloomberg, the collapse of London lender Market Financial Solutions has already reached institutions such as Apollo Group and Jefferies. Miller Tabak Chief Market Strategist Matt Maley commented:

Investors are starting to worry that this negative sentiment may spread. Even if it doesn't, the increasingly severe problems in the credit market still pose risks of losses for financial companies.

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