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

by: Zacks Investment Research

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. (NYSE:RF), Comerica Inc. (NYSE:CMA) and ZION Bancorporation (NASDAQ: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 (NYSE:GS), Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE: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 (NASDAQ:FITB), Huntington Bancshares Inc. (NASDAQ:HBAN), PNC Financial Services Inc. (NYSE:PNC), SunTrust Banks, Inc. (NYSE:STI), KeyCorp (NYSE:KEY) and US Bancorp (NYSE: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.