Monday, July 21, 2008

Regional US banks in fears of cash calls

Regional US banks in fears of cash calls

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US regional banks will draw scrutiny during earnings season this week amid fears that losses on home equity and residential construction loans may force some to raise fresh capital or put themselves up for sale in turbulent markets.

Shares of regional lenders have come under heavy pressure on fears about the ability of smaller institutions to ride out the turmoil in the banking sector.

Such fears were thrown into stark relief last week after US banking regulators took over California-based IndyMac, making it the second-largest banking failure in US history, and leading to queues of anxious depositors outside branches.

After mixed earnings reports from regional lenders thus far, a flurry of banks with large portfolios of real-estate loans will report their second-quarter results on Tuesday, including SunTrust, Regions Financial, Fifth Third and KeyCorp, while National City will follow on Thursday.

Last week, Pittsburgh-based PNC and Ohio-based Huntington BancShares were the only two banks to report higher profits in the second quarter.

While financial services ended last week as the second-biggest boosters of the S&P 500, regional banks were one of the heaviest drags. The S&P regional banks index ended Friday's session down 0.8 per cent.

Keith Horowitz, banking analyst at Citigroup, said that as losses from portfolios of home equity and residential construction loans mount, "a number of banks will be forced to come to seek their first, or in some cases second or third rounds of capital, and as time progresses it will be increasingly difficult and more costly to raise".

However, investors fear that many regional lenders, particularly banks with smaller deposit bases or less strategic attraction for private equity funds, could struggle to raise new capital.

Many larger banks with stronger brands have already tapped investors for fresh funds and the value of those investments has deteriorated amid the recent slide in bank stocks.

Analysts say consolidation in the sector – the traditional escape hatch for pressurised regional banks – may also be less realistic in the current crisis.

David Hendler, analyst at CreditSights, a research provider, said: "Even relatively healthier banks are for the most part now saddled with their own credit problems and/or merger integrations ... they are therefore less likely to rescue banks which may need a saviour."

New accounting rules that force an acquirer to value a target's portfolio at current market prices may also stand in the way of consolidation for troubled regional banks, as potential buyers may be deterred until there is evidence that credit deterioration has slowed or access to fresh capital is more readily available.

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