Regionals are exposed to credit crisis

The US regional banks are certainly the next set of financial institutions in the US that are going to get hit by the credit crisis. While these banks did not have significant exposure to the CDOs and RMBSs and other types of derivative instruments that have caused the majority of writedowns to date, they do have large exposure to the housing and construction industry.

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The U.S. regional banks are certainly the next set of financial institutions in the U.S. that are going to get hit by the credit crisis. While these banks did not have significant exposure to the CDOs and RMBSs and other types of derivative instruments that have caused the majority of writedowns to date, they do have large exposure to the housing and construction industry.

The regional banks have significant amounts of construction and commercial property loans on their books. When I talk about regional banks, I mean banks like Fifth Third, KeyCorp, AmTrust and others with strong regional franchises, but without a national presence like the banks which have written off large amounts in the subprime crisis to date.

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KeyCorp is the canary in the coalmine as they have just announced large losses on their loan portfolios and have suffered their worst one-day decline since the Crash of 1987. As the subprime crisis morphs into a credit crisis and a recession, with increasing effects on the real economy, expect the regionals to become more severely burdened.

KeyCorp fell the most since the stock-market crash of 1987 after doubling its forecast for loans that won’t be repaid, prompting concern that regional banks have underestimated the cost of bad mortgages.

KeyCorp sank 10.6 percent in New York Stock Exchange trading after saying uncollectible debts may be as much as 1.3 percent of average total loans this year. The figure may rise even more, KeyCorp said, as the Cleveland-based company cuts holdings tied to homebuilders.

The revision by the Ohio bank, which last month quadrupled its provision for loan losses to $187 million, may foretell similar increases at U.S. commercial banks as home prices keep sliding, analysts said. The S&P/Case-Shiller home-price index fell 14.4 percent in March to the lowest since figures were first published in 2001, data released yesterday show.

“Things are getting significantly worse before they are going to get better for KeyCorp and the banking industry,” RBC Capital Markets analyst Gerard Cassidy said in a note to investors today. He rates KeyCorp “underperform.”
Bloomberg, 28 May 2008

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