Regions among those seen facing stress-test struggle

Thursday, April 23, 2009 at 11:33pm
Linda Shen and Dawn Kopecki, Bloomberg News

Regions Financial Corp. and Fifth Third Bancorp — two of the Nashville area’s largest banks — may be among regional lenders that struggle to pass the U.S. government’s stress test because they are mired in commercial real-estate debt, analysts say.

Commercial loans in default or foreclosure rose 43 percent to $65.9 billion during the first quarter, according to New York-based research firm Real Capital Analytics Inc. Property values have fallen at least 30 percent since a 2007 peak. Fifth Third and Regions hold too many commercial mortgage and construction loans on their books, said Jeff Davis, research director for Howe Barnes Hoefer & Arnett.

“The loss rates on commercial are going to be horrific and the big guys avoided a lot of this because they were securitizing it,” said Christopher Whalen, co-founder of Institutional Risk Analytics in Torrance, Calif. “We’re talking about malls and developments in the local markets where the regional banks are the primary delivery form of finance for commercial real estate development.”

Regions and Fifth Third are among 19 U.S. lenders bracing for preliminary results due Friday from a government stress test of whether they have enough capital. The industry as a whole needs $1 trillion, Keefe Bruyette & Woods said in a research note Thursday, citing its own stress test.

Analysts speculate that the nation’s biggest banks, including JPMorgan Chase & Co. and Wells Fargo & Co., will do better on the test because they have cut risk by selling off loans and piling up reserves. Wells Fargo said Wednesday it has put aside $23 billion, enough to cover two years of losses on commercial loans and mortgages.

CRE set for a ‘hard and fast’ decline

Meredith Whitney, the former Oppenheimer & Co. analyst who correctly predicted a slide in shares of U.S. banks, said regional lenders may struggle to pass the stress tests.

Commercial real estate will decline “hard and fast,” Whitney said this week in an interview on Bloomberg Television. “For a lot of the regional banks that have so much commercial real estate exposure as a percentage of their core capital levels, it’s going to be more difficult.”

Regional banks operate in multiple states and rank among the top 50 in the U.S. by assets, excluding the four money-center banks: Bank of America Corp., JPMorgan, Wells Fargo and Citigroup Inc. Cincinnati’s Fifth Third and Regions, based in Birmingham, have too many homebuilder loans and do business in states with high jobless rates such as Michigan and Florida, said Davis, who is based in Nashville.

Regions, BB&T Corp. and SunTrust Banks Inc. each hold commercial real estate loans that make up more than 10 percent of their loan portfolios, according to Friedman Billings Ramsey Group Inc. SunTrust, which posted an $815 million first-quarter loss Thursday, said debt it doesn’t expect to be repaid more than doubled to $610 million, “driven by commercial, residential mortgage, home equity, and real estate construction loans.”

Ohio’s Fifth Third said Thursday that commercial mortgage and construction loans made up $17.5 billion, or 21 percent, of its $83.5 billion loan portfolio. The same types of loans accounted for $153 million in uncollectible debt in the quarter, with commercial construction loans representing 6.2 percent of charge-offs in the period.

“We expect core earnings to strengthen and credit costs to decline significantly,” Chief Executive Officer Kevin Kabat said on a conference call Thursday.

At Regions, commercial real estate loans make up 15 percent of its total lending portfolio, FBR analysts said in an April 22 research note. Non-performing loans totaled 2.4 percent. The non-performers suggest that “future credit losses will be elevated,” FBR analyst Scott Valentin said in an April 22 note.

Regions on Wednesday reported first-quarter net income of $77 million after setting aside less money for future loan losses than analysts had expected. The bank has cut its risk by selling off loans linked to real state and isn’t seeing an increase in defaults on other business loans, William Wells, the bank’s chief risk officer, said on a conference call.

“Credit quality is still very difficult, but the signs are there that the banking industry is going to work its way through this,” CEO Dowd Ritter said Wednesday.