Sector Snap: Regional banks slump after downgrades

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NEW YORK -Shares of regional banks tumbled Monday alongside the broader market as downgrades on a handful of companies underscored concerns that higher loan losses will hamper bank earnings over the next several quarters.

The KBW Bank index, which tracks 24 of the nation's largest banks, fell 2.8 percent in afternoon trading. The overall market was down, too, in part due to a strengthening dollar.

In research notes compiled over the weekend, Rochdale Securities bank analyst Richard Bove said third-quarter results suggest rising loan losses will continue to eat into regional banks' earnings over the next several quarters, preventing many from showing a profit until 2011. Based on future earnings potential, current stock prices appear to be overheated, he said.

Bove lowered his ratings on Fifth Third Bancorp and SunTrust Banks Inc. to "Sell" from "Neutral." He also cut his rating on US Bancorp to "Neutral" from "Buy."

Fifth Third shares dropped 61 cents, or 5.9 percent, to $9.73 in afternoon trading, while SunTrust fell 97 cents, or 4.6 percent, to $20.02. US Bancorp lost 70 cents, or 2.8 percent, to $24.25.

Bank stocks have been among the best performers throughout the stock market's nearly eight-month rally as stronger-than-expected earnings in the first and second quarters gave investors hope that banks were on steadier footing.

Since the market tumbled to 12-year lows in early March, the KBW Bank Index has risen 137.1 percent. That compares with a 59.6 percent increase in the benchmark Standard & Poor's 500 index over the same period.

Third-quarter results from banks show higher loan losses across the industry as consumers and businesses still struggle to pay their debts. However, many big banks have been able to mitigate losses with solid retail banking or trading operations. Smaller, regional banks that are concentrated in hard-hit areas of the country have not been able to offset higher loan losses.

Last week, SunTrust reported a big third-quarter loss as it more than doubled the amount of money set aside to cover souring loans. Total loan losses nearly tripled to more than $1 billion.

The Atlanta-based bank has a high concentration in Florida and other Southeastern states that have been devastated by the housing crisis.

SunTrust "seems to be facing intractable problems in Florida and housing," Bove wrote. "The loan losses from this source may keep the company in a loss position until the beginning of 2011."

The outlook for future earnings is not good at Fifth Third, either, Bove said. The Cincinnati-based bank said last week that its loss widened in the third quarter as loans in the Florida and Michigan markets were hammered.

"I think that 2010 is going to be a tough year for the industry and that these stocks do not have built in to their prices this potential," he wrote.

Other big decliners Monday included Regions Financial Corp., which dropped 36 cents, or 6.5 percent, to $5.17; KeyCorp, which fell 31 cents, or 4.8 percent, to $6.17; and Zions Bancorp, which lost 73 cents, or 4.3 percent, to $16.09.

Shares of Synovus Financial Corp. sank nearly 10 percent, losing 29 cents to $2.63.

2009-10-26 13:40:54