Research Roundup: Regional Banks in the Spotlight

by: Research Recap

Regional banks are in the news again following a raft of ratings changes, mostly downward, by Sanford C. Bernstein.

From Street Insider via AlacraPulse, Bernstein:

Upgraded BB&T (NYSE: BBT) from Market Perform to Outperform, noting that BB&T has already repaid its TARP funds and its share count now looks “steadier”.

Downgraded M&T Bank (NYSE: MTB) from Outperform to Market Perform. The firm believes that MTB will likely need to raise equity and could be put under pressure as “they remain profitable and are still paying their shareholders a handsome dividend.” Shares of MTB are down about 0.9% to $75.90 in the pre-market session.

Downgraded Fifth Third Bancorp (Nasdaq: FITB) from Outperform to Market Perform, citing valuation. Following a reassessment of the firm’s TARP repayment scenarios for mid-cap banks, Bernstein points out that recent exits were as high as 75% of the repayment.

Bernstein also made the following price target revisions:
Marshall & Ilsley (NYSE: MI) from $11 to $9.50, maintains Outperform
Zions Bancorp (Nasdaq: ZION) from $27 to $26, maintains Outperform
Comerica (NYSE: CMA) from $38 to $35, maintains Market Perform
SunTrust Banks (NYSE: STI) from $30 to $27, maintains Market Perform

Meanwhile, in a new Industry Report Card Standard & Poor’s notes that large regional banks reported yet another weak quarter in fourth-quarter 2009. “Elevated loan-loss provisions and charge-off rates dampened operating results, and credit continued to weaken among prime residential mortgages, nonresidential construction, commercial real estate (CRE), and commercial and industrial (C&I) loans.”

Despite some signs of an economic recovery, CRE and consumer loans, whose performance tends to lag the overall economy, continued to deteriorate. However, capital and liquidity ratios generally improved in recent quarters, aided by equity issuances, deposit growth, and balance-sheet contraction.

Selected S&P comments on specific banks:

  • We expect BB&T to continue to remain profitable, as it continues to address asset-quality issues in its real estate-related portfolios.
  • We continue to acknowledge Fifth Third’s pretax preprovision earnings capacity to support significant charge-off levels, but we expect elevated credit costs and weak economic conditions to pressure profitability through 2010.
  • However, we view (Zion’s) capital ratios as slightly weak compared to other large regional banks . . . . We remain modestly concerned with the bank’s nearly $1.2 billion (carrying value) portfolio of collateralized debt obligations, consisting primarily of trust-preferred securities, given the potential for further impairments.
  • We believe that SunTrust will continue to see elevated credit costs in 2010 as the residential real estate cycle continues to unfold in the Southeast U.S.
  • Despite difficult economic conditions, Comerica’s loan portfolio still has good credit quality in our opinion, in part due to the bank’s relatively small exposure to residential construction loans, preference for owner-occupied loans, and significant underlying collateral values.

For details, see: Industry Report Card: Continued Credit Deterioration Hurts U.S. Large Regional Banks’ Fourth-Quarter Results (Premium)

Goldman Sachs analysts Brian Foran, Richard Ramsden, Adriana Kalova and Quan Mai earlier this week reiterated their Buy rating for SunTrust with a price target of $32.

Keefe, Bruyette & Woods analyst Brian Klock last month raised his price target on Comerica by $1 to $38.

Zacks last week upgraded its recommendation on the shares of Zions to Neutral from Underperform.