Merrill Slashes Outlook for Banks

"We do not expect credit metrics to begin to recover until 2010," Najarian writes.

The Keefe, Bruyette & Woods Bank Index, which comprises 100 of the largest banking stocks has dropped 26% over the past seven weeks. The index dipped nearly 3% at the beginning of the day but has since moved into positive territory.

Analysts expect more dividend cuts from banks that either haven't already done so or those that have and need to slash their dividends more. Wachovia, Nat City, WaMu, KeyCorp (KEY Quote - Cramer on KEY - Stock Picks) and Fifth Third have slashed their dividends.

The Fox-Pitt and Merrill analysts say BofA, SunTrust, Regions, Comerica (CMA Quote - Cramer on CMA - Stock Picks), Marshall & Ilsley (MI Quote - Cramer on MI - Stock Picks) are vulnerable to dividend reductions, and Wachovia may cut its payout even more.

The regional banks are much more susceptible to falling real estate markets in their footprint since they typically have significant exposures to small- and midsize commercial clients. A host of banks have already acknowledged that the residential construction market has taken a hit in many areas, but now commercial construction loans are also increasingly at risk.

"The commercial real estate market has become very soft, particularly hard-hit residential markets such as Florida, California, Arizona and Nevada," writes Citi analyst Tobias Levkovich in a note Thursday. "This represents a challenge for regional banks that made loans to developers of small commercial buildings, strip malls and professional office structures."

Huntington Bancshares(HBAN Quote - Cramer on HBAN - Stock Picks) was the latest bank to pre-warn late Thursday, but the news coming from the Columbus, Ohio-based bank was more positive than the recent warnings of its Midwest competitors KeyCorp and Fifth Third .

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