Key, Banks Slip on Loan Concerns

Shares of large- and mid-size banks slumped on Wednesday after KeyCorp(KEY) surprised Wall Street by warning of higher-than-expected loan losses.

Key shares slid more than 12% Wednesday after the bank said it expects to charge off more debt due to soured loans to homebuilders.

The Cleveland-based bank said in a Securities and Exchange Commission filing late Tuesday that it expects net loan charge-offs this year to be in the range of 1% to 1.30% of average loans, up from a previous estimate of 0.65% to 0.90% of loans. Key said in the filing that charge-offs in the second quarter and possibly the third quarter would run "above this range as [Key] deals aggressively with reducing exposures in the residential homebuilder portfolio."

Key also expects "elevated" net loan charge-offs in its education and home equity loan portfolios.

At least one analyst says that more banks will take Key's cue and warn of higher losses.

"The disclosure is bad news for Key specifically today, but we think it is also bad news for most other lenders as well," writes Scott Siefers, an analyst at Sandler O'Neill & Partners.

"[R]esidential development and home equity portfolios have dogged many in the industry for the past several quarters, and it is becoming [increasingly] apparent that these same portfolios will continue to do so for at least a few more," Siefers writes. "Consequently, we suspect that Key simply happens to be among the first so far to increase its [net charge-off] guidance, and as time goes on, we would expect similar deterioration to impact many others in the industry as well."