Regional Banks' Dreadful Q2 Earnings: How Bad Will It Be?

Results for regional banks may be dreadful in the second quarter 2009, as evidenced by the companies who have already reported their results.

Regions Financial Corp. (RF), Comerica Inc. (CMA) and ZION Bancorporation (ZION) reported losses in the quarter primarily due to continued strain in their loan portfolios, as the commercial sector continues to droop in the prolonged recession.

Along with continued losses in their residential mortgage, home equity and consumer loan portfolios, these banks are also showing continued distress in their residential and commercial development loans, as well as commercial real estate loans.

Large-cap center banks and brokerage firms like Goldman Sachs (GS), Bank of America (BAC) and JPMorgan Chase (JPM) were able to somewhat offset weak credit metrics by strong results in their investment banking and mortgage refinancing divisions.

Regional banks, however, are much more directly connected to the state of the economy and the interest rate spreads. Weak demand for lending as a result of a shaky economy can severely affect their profitability as borrowers, thereby increasing nonperforming assets.

The mounting credit concerns suggest that a majority of the regional banks reporting their earnings in the coming week will report losses. Banks reporting this week are Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), PNC Financial Services Inc. (PNC), SunTrust Banks, Inc. (STI), KeyCorp (KEY) and US Bancorp (USB).

Though commercial loan losses are seen as the final stage of a downtrend in a credit cycle, it still remains to be seen just how severe it turns out to be.

Comments

[Novice Trader]

Cramer has been pushing HBAN this stock for months now. He can take his recommendation for this stock and stick it up his A@$.

2009 Jul 23 09:30 AM

[Tack]

Regional banks, which hold a lot of commercial realty, having been scared to death by the original residential writedown parade, have built sizable reserves against future losses. In some cases, there reserves are four to five times the size of current writeoffs. These reserves are already refelected in the income statements and balance sheets, so unless commercial losses arrive in historic fashion reserves will be adequate and just be future reversals into earnings in many cases.

Also, the prices of banks, again, especially, the regionals, have been so decimated, as to suggest that calamity is already priced in. In fact, over-priced in.

Further, the regional banks will benefit from the now improving residential markets and gradually better economy, not to mention the huge spreads all banks now enjoy. As a cherry on top, they'll scarf up some of CIT's loan business, too.

That at least some of the market recognize this situation is demonstrated by the reaction to the various regional reports this week. At first, prices dropped, as reserve additions were trumpeted by the media, then, the buyers arrived in force, driving shares into the green on volume.

In my own estimation, regional banks will be among the largest winners in percentage price appreciation over the next few years

2009 Jul 23 01:11 PM

[Mark54]

Will the third or fourth quarter be the "come to Jesus" quarter? No one ever takes Q2. Have no clue but its coming. The rest of 09 will be very telling.

2009 Jul 23 09:09 PM

[JediMaster]

Regions Bank (RF) is without a doubt the worst performing regional bank and maybe the worst performing bank that has yet to file Chapter 11 or be bought out....these redneck Alabama executives have leveraged the entire company into defaulted Florida commercial real estate...it is time they pay for it....Dowd Ritter is an idiot.....

disclosure --- no position

2009 Jul 27 10:45 AM