Good News, Bad News for Regional Banks

By Kevin Grewal

What potential effect could a cut in financial strength ratings of regional banks have on an already ailing industry and their exchange traded funds?

On Thursday, Moody’s said that it might cut the financial strength ratings of 23 regional banks because of higher credit losses, caused by the housing and economic crisis, than previously expected. Additionally, Moody’s put the deposit and debt ratings of 17 of the 23 banks on review for downgrade and changed the outlook of 19 of the 23 to negative from stable, states Reuters.

A combination of a sharp decline in commercial real estate, rising corporate defaults and the deterioration in residential loans are the main causes for these raised expectations of losses and negative future outlook of these banks.

These losses will most likely put a damper on the capital position of most banks, which will give the industry yet a further blow. The banks that will most likely be downgraded are the ones that have significant exposure to commercial real estate, especially construction and land development.

Some of these banks include U.S. Bancorp (USB), PNC Financial Services Group (PNC), Sun Trust Banks (STI) and KeyCorp (KEY). This downgrade could have a negative impact on regional bank ETFs, such as the SPDR KBW Regional Banking ETF (KRE), which is down 37.6% year to date. Despite the warnings, KRE is up 22.5% in the last week.

Comments

[James Wilson:]

What Bull!!!!

R F is in fine shape.

Mar 13 09:00 PM

[oldman:]

very little thought in this article.

Mar 14 09:26 AM

[Etched in S...:]

During a game, to change the rules benefits the side calling for the change. Eliminating "mark to market" is the same.

Mar 14 11:15 AM

["litle" guy:]

Makes one wonder what's in it for Moodys. Same goes for S & P. To say nothing about the so-called " Steet Experts".
They all tend to "pimp" the markets to the bewilderment of the individual invester.

Mar 14 07:32 PM

[nutty buddy:]

Moody's is still way behind the curve - playing catch-up - and about to over-steer.

Mar 15 08:34 AM

[Chris B:]

What's interesting is that these banks are still selling for around 13X earnings. Each stock is a different story, but this could mean that investors:

1) are optimistically setting up to ride the banks to outside gains during the recovery on the theory that the riskiest sectors will rise fastest,

2) are pricing the banks on what earnings would be if not for temporary, crisis-related writeoffs,

3) or are betting that these regional banks will be eating up the market share of the severely handicapped national banks, such as C and BAC, driving double-digit growth.

Mar 16 12:38 PM

[jamesa40:]

Moody's is just making up for their lack of integrity on all the securities they mis-graded earlier. Granted, some banks may have to tap the proverbial trough, but given all the new stipulations being put on the banks who took the money, I would figure that the strong ones are doing everything they can to give the money back, not take more. Some of the names on their list baffles the mind.

Mar 17 08:45 AM