Uneasy Silence About Regional Banks

The Wall Street Journal has a nice article outlining the financial situation at the major banks, and an impressive graphic which goes with it. But for Bank of America (BAC), which does need to raise a substantial amount of capital, most big banks have come out relatively unscathed.

Media Campaign Gets a Big Thumbs Up

The administration has done an excellent job in managing the market during this process. The banks have been under strict instructions not to say anything about the results. However, the results have been selectively leaked to the media. The leaks have reinforced the belief that the banks are in much better shape than some of the naysayers were claiming. This has resulted in a massive rally in financials this week, further helping the ability of the banks which need capital to raise capital if needed.

Regional Banks: Where are the Leaks?

If there is one glaring gap in the leaks is that there is a virtual black-out about the health fo the regional banks. There has been no leaks about the capital requirements at the regional banks BB&T (BBT), Fifth Third (FITB), KeyCorp (KEY), PNC Financial (PNC), Regions Financial (RF), SunTrust (STI) and US Bancorp (USB). Many of these banks, especially Regions, do not have a large cushion of preferred capital to convert to common.

Risk Concentration: Geographical and Commercial Real Estate

More important, they have a large exposure to commercial real estate and construction investing. Unlike the large banks whose exposure is primarily to consumers via credit-cards, auto-loans and of course home mortgages, the smaller regional banks are tied much closer to the business activity in their local region and are hence less diversified geographically.

The commercial real estate market is going through a painful recalibration where investors now expect much higher cap rates as the massive risk taking of the past few years is coming back to haunt the markets. When the economy resets at a smaller size before growing up, it may take years for the excess capacity to be absorbed, forcing many of the leveraged deals used to finance new commercial real estate to teeter on the verge of bankruptcy.

Time to Book Profits?

As I noted in an earlier post, I have established a position in FAZ, in anticipation of some profit taking. I am also concerned that the lack of any leaks about the regional banks does not portend well for what we are likely to hear.

Disclosure:I hold a short position in financials via FAZ in my trading account. I also hold stock and options in other financials including Citibank, Ultra 2X Bull (UYG) in other accounts.

Comments

[Kenny Sullivan]

Ever hear of spell check? Poor spelling, poor grammar and an obscure, if not wrong, use of of the word tether are unprofessional. I began looking for errors in the article, rather than looking for content.
Kenny Sullivan

2009 May 07 10:36 AM

[Vikram Saxena]

1. I am sorry for the spelling error. This was done very late last night and Seeking Alpha's editor does not have a spell-check (or allow the built in checker of Chrome to highlight spelling mistakes).

2. Before the wireless revolution what you call the obscure was the more common idiomatic use of the word
www.thefreedictionary....


On May 07 10:36 AM Kenny Sullivan wrote:

> Ever hear of spell check? Poor spelling, poor grammar and an obscure,
> if not wrong, use of of the word tether are unprofessional. I began
> looking for errors in the article, rather than looking for content.
>
> Kenny Sullivan

2009 May 07 10:55 AM

[greedcanbgood]

"Many of these banks, especially Regions, do not have a large cushion of preferred capital to convert to common."

Your analysis is incomplete unless you provide details. Otherwise, the reader is led to believe that all your regional listed are in the same boat and clearly, they are not.

2009 May 07 11:02 AM

[Vikram Saxena]

What I wanted to highlight was the complete black out about the regionals. Given Team Obama's media savvy, I would like to see some proof before I jump in.

The note about preferred is from the WSJ article. I am including the relevant excerpts below.
Quote WSJ:
"In addition, it isn't clear what happens to hobbled regional banks that could have a hard time finding extra capital. Many are facing a deluge of bad loans to finance residential and commercial properties.

Regions, based in Birmingham, Ala., is among a handful of the tested banks without any privately held preferred shares that it could convert into common stock to boost its capital buffer, according to Deutsche Bank. That leaves it with a narrow range of options beyond turning to the government for aid."

On May 07 11:02 AM greedcanbgood wrote:

> "Many of these banks, especially Regions, do not have a large cushion
> of preferred capital to convert to common."
>
> Your analysis is incomplete unless you provide details. Otherwise,
> the reader is led to believe that all your regional listed are in
> the same boat and clearly, they are not.

2009 May 07 12:09 PM

[helplessobserver]

I do not know about the others, but the only solvent large bank in the Southeastern US is BBT. Residents crushed by the losses taken by the mismanagement of Wacovia and Bank of America are moving to the only good bank around. Thousands of bank jobs have been lost and these ex employees are not staying with their previous employers. CEO Kelly King has managed to keep generating earnings while doing everything possible to work out troubled loans. If he needs capital he can cut the generous dividend.

2009 May 07 04:59 PM