Wall Street sours on regional banks as loan troubles spread

From Times staff writer Walter Hamilton:

Regional bank stocks aren’t the haven that investors hoped they would be -- as shares of Cleveland-based KeyCorp. demonstrated today.

KeyCorp stunned investors late Tuesday by warning that loan charge-offs would surge this year. Its shares plunged $2.29, or 10.4%, to $19.66 today, the lowest since 2000.

The news also walloped shares of other regional banks, including Atlanta-based SunTrust Banks, which slid 4%; Birmingham, Ala.-based Regions Financial, down 5%; and Comerica Inc. of Dallas, down 3.8%. L.A.-based City National Corp. fared better but still lost ground, off 2.4%.

Many regional bank issues held up comparatively well last year while financial titans such as Citigroup Inc. were slammed by sub-prime mortgage losses and the shock effects from Wall Street’s credit crunch. The regionals were viewed as a potential refuge because the companies hadn’t engaged in some of the high-risk lending practices that landed bigger banks and brokerages in hot water.

But as the housing downturn has continued and the economy has weakened, troubles in home-loan portfolios have bled into auto loans, credit cards and other areas, said Michael Andrews, a banking analyst at research firm SNL Financial.

KeyCorp said its net loan charge-offs this year will be between 1% and 1.3% of total loans, up from its previous estimate of 0.65% to 0.9%. The bank cited home-improvement and student loans as two sectors facing "elevated" losses.

"Regionals are suffering a backlash because people saw them as more conservative investments and as being more insulated from asset-quality deterioration than they really are," Andrews said.

Among the nearly 600 banks that SNL tracks, the percentage of non-performing loans to total loans has more than doubled in the past year, to 1.37% in the first quarter. And return on equity, a basic measure of profitability, has been cut in half in the last two quarters.

With loan woes spreading in the banking system, many regional bank stocks have fared worse than Citigroup’s shares since the second quarter began. That is weighing on the BKX index of 24 major bank issues. The index closed today at 75.64, just slightly above the five-year closing low of 75.31 set on March 10.

Though Wall Street doesn’t expect bank loan problems to match those of the S&L crisis of the late-1980s, the selling pressure on the regionals' stocks shows investors still are coming to grips with the prospect of heavier credit write-offs.

"I don’t believe we’ve hit a bottom yet" in the stocks, Andrews said.