Regional banks are suffering

In the aftermath of the Meltdown of the GSEs and the heavy-handed regulatory solution used to stem the tide, regional banks are in focus for investors as they stand to the take the brunt of short-selling.

Financial services bears know full well that the regionals are not too big to fail. No one is coming to their rescue like the list of 19 protected institutions. Fair or not, this is the reality regionals face as the reporting season hits full stride.

There were five earnings reports from regionals today. I will highlight them here. NCC has yet to report and is due to report this Thursday.

Wachovia
Wachovia is the biggest and the worst of the lot, recording a nearly $9 billion loss for the quarter. The company slashed its dividend and is going to cut 6500 workers from its payrolls. Clearly, Wachovia is in a world of hurt.

Wachovia’s goodwill impairment charge didn’t include its Golden West business “due to the value of the retail banking franchise,” the company said. The impairment included $4.5 billion in reduced value of commercial loans, plus $597 million in investment-banking assets……..

The outlook for housing worsened in the second quarter, Wachovia said. Twenty-five metropolitan areas account for 90 percent of the option ARM historical losses with 22 of those markets in either California or Florida, the bank said. The exceptions include Washington D.C., Phoenix, Arizona and Las Vegas.
Bloomberg, 22 Jul 2008

Need I say more? Wachovia looks dreadful.

Regions Financial
The Alabama-based regional slashed its dividend too. But, at least it made a profit.

Net income fell by half to $206.4 million, or 30 cents a share, from $453.3 million, or 63 cents, a year earlier, the Birmingham-based bank said today in a statement. Excluding merger-related charges, Regions earned 39 cents a share, missing the 43-cent average estimate of 19 analysts surveyed by Bloomberg.

Regions joins at least 16 other U.S. financial firms that cut their dividends this year, exceeding the previous five years combined, as companies hang on to capital to absorb soaring loan losses. Regions said the cut in the quarterly dividend, to 10 cents a share from 38 cents, would save $780 million a year.

This is Alabama’s biggest bank. But, they have gotten themselves in real trouble by expanded out into Florida, which has been hit hard by the housing downturn.

SunTrust
SunTrust is looking a lot better than Wachovia. If you recall, SunTrust and First Union were in a tussle over a Wachovia takeover back in 2001. First Union won and proceeded to take on the risks that SunTrust has since avoided, Golden West Financial, a top-of-the-market acquisition included. Clearly, SunTrust has been battered, but it has better managed risk than the new Wachovia (which is really First Union).

SunTrust Banks Inc., the largest bank based in Georgia, said second-quarter earnings dropped 21 percent as more real estate loans went sour. The shares rose 4 percent in early New York trading after SunTrust said it won’t sell new shares or cut the dividend.Net income available to common shareholders fell to $535.3 million, or $1.53 a share, from $673.9 million, or $1.89, in the year-earlier period, the Atlanta-based company said in a statement today. Earnings excluding gains from selling stock in Coca-Cola Co. were 78 cents a share, exceeding the average analyst estimate of 66 cents.

Bloomberg, 22 Jul 2008

Fifth Third
Relatives close to me own shares in this bank, so I have been watching them closely. They have really taken it on the chin with all the other regionals in the Midwest. Fifth Third, like Regions Financial, got into trouble by expanding into Florida, a big mistake. Things in the Midwest are bad enough without moving into unknown volatile markets. Stick to your knitting I say.

Fifth Third Bancorp, Ohio’s second- largest bank, posted its first loss in at least nine years as the lender set aside more money to cover bad debts in distressed housing markets including Florida and Michigan.The net loss was $202 million, or 37 cents a share, compared with a profit of $376 million, or 69 cents, in the same period a year earlier, the Cincinnati-based company said today in a statement. The bank had a profit of 5 cents a share excluding a tax charge related to leveraged leases. Last month the bank forecast earnings of 1 to 5 cents.

Chief Executive Officer Kevin Kabat braced Fifth Third for further losses last month by slashing the dividend 66 percent and announcing plans to raise $2 billion selling shares and subsidiaries. The bank tripled its charge-offs for loans it expects won’t be paid back, and boosted its provisions against future bad loans sixfold to $719 million.

Bloomberg, 22 Jul 2008

KeyCorp
Key rounds out our five here. Yet another company that moved into unknown boom markets at the peak of the housing bubble. This is clearly a mistake. These regonials were chasing the hot deals and looking to make a fortune in markets they had no business entering. Now, they have egg all over their faces. Look to CRE (commercial real estate) loans in the future as the key (pun intended) to the company’s fortunes down the line. Despite the Bloomberg story about a one-time loss, Key is still heavily exposed to future losses due to its construction and CRE exposure.

KeyCorp, Ohio’s third-largest bank, reported its first unprofitable quarter since 2001 as the lender lost a tax case tied to leasing and set aside more money to cover bad loans. The shares fell 12 percent in early trading.The second-quarter net loss was $1.13 billion, or $2.70 a share, compared with a profit of $334 million, or 84 cents, a year earlier, the Cleveland-based bank said in a statement today. While the cost of the tax case was less than the bank forecast, the cost of uncollectible debt was higher than expected, said Jeff Davis, an analyst with FTN Midwest Securities.

“More important is going to be what happens to credit quality,” Davis said in an interview today. “It’s about asset quality, and where does capital stand at this point in time.”

Chief Executive Officer Henry Meyer has stopped lending to builders in places where the bank has no community banking operations after defaults in states including Florida and California that prospered during the housing boom. KeyCorp raised more than $1.7 billion in the quarter selling convertible and common stock and halved its dividend after losing the tax case.

Bloomberg, 22 Jul 2008

Comment
Basically, the regionals have no Fed, Treasury, or SEC backstop like the golden list of 19. If any of them gets into trouble they will fail. I reckon at least one of the major regionals will fail by early 2009 and see this group of banks as particularly toxic. They all got into areas they had no expertise in and made huge losses there. This is a classic case of why tighter regulation was necessary in boom times to prevent these companies, important in their respective regions, from over-extending themselves outside their areas of expertise. SunTrust looks like the brightest bulb in the pack.

For other posts on the regionals, see the tag ‘regional banks‘.

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