Regional Banks Recovering but CRE Still a Risk for Some

Includes: ASB, WBS, WL, WTNY
by: Research Recap

Most of the smaller U.S. regional banks and thrifts rated by Standard & Poor’s showed signs of recovery in first-quarter 2010, but commercial real estate remains a worry for some.

In a new Industry Report card S &P said the divergence between the better and badly performing companies continued to widen, though, as several continued to struggle, with some posting losses. The sector as a whole reported its highest average net income in more than a year and a solid quarterly improvement in profits. In our view, earnings improvement was directly related to a 36% drop in loan-loss provisions since fourth-quarter 2009, as loan charge-offs were generally lower. Capital at most of these banks strengthened, and some successfully accessed the financial markets through equity issuances.

Only four of the 23 of our rated smaller regional banks reported losses; these were Associated (ASBC), Webster (NYSE:WBS), Whitney (NASDAQ:WTNY), and Wilmington Trust (NYSE:WL). For most banks, net interest margins increased marginally, pushing up core earnings. This was primarily because of favorable deposit pricing. Noninterest revenues, on the other hand, were generally flat to slightly down, as higher deposits and lower loan demand kept fee income down. Most of the loan portfolios continued to shrink, from a combination of this anemic demand and tighter underwriting standards. Deposits remained stable or increased gradually at most banks, and liquidity remained strong, with continuing growth in core deposits and better access to other funding options as market conditions improved on last year’s.

For the rest of 2010, we expect that credit quality could be volatile for some among the smaller U.S. regional banks we rate. This is especially true for the CRE lenders, who often have significant single-borrower exposures.

Other loan categories that remain pressured include poorly underwritten residential mortgages and home-equity loans, residential mortgages in certain badly affected regions, and commercial loans. By region, the worst credit profiles remain among banks with large exposures to states with depressed real estate prices in recent years, particularly Arizona, California, Florida, Georgia, and Nevada. We believe that markets could soften in other regions before year-end.

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