Regional Banks: It's All About Credit

[Investors want to make sure] banks have enough capital. Conserving capital and building loan loss reserves and starting to remediate loans off the balance sheet are key priorities, along with restoring investor confidence and management credibility because right now it's at the bottom of the barrel. Management has done it to themselves, but I went back to the last credit cycle -- it was the same thing. Everybody thought the world was ending. We're at the bottom of the cycle again, saying the world's ending and everybody's capitulating and selling everything and going short and at some point this group is going to get overdone. The pendulum in my view is swinging over to the other side.

One large reason why investors have flocked to bank stocks is because of the dividend story, but banks are now in capital preservation mode. Should we expect to see more cuts to banks' dividends as second-quarter results are reported? Which regional banks are most at risk?

Absolutely. I think the issue here is that the banks need to conserve capital. That's the No.1 priority, because it's all about safety and soundness and building credibility. Cutting the dividend for a short term -- and letting investors know that this is a difficult environment and that the banks will get through this is what they need to do. [Some] banks [are likely to cut the dividend] where the payout ratio is high, such as Synovus(SNV Quote), Comerica(CMA Quote), SunTrust(STI Quote) and Wachovia(WB Quote) -- again. There are banks that could go to stock dividends, such as First Horizon(FHN Quote) did last quarter. Colonial Bancgroup(CNB Quote) could be a bank that goes to a stock dividend.

What about other forms of capital raises? Who is most in need?

SunTrust and Wachovia are at the top of my list. I don't think either one is out of the woods, even though SunTrust did come out and say they didn't need it. My concern is that SunTrust has just got a lot of [exposure in] Florida, just like the other banks. And they've been a little late to the party, they're lightly reserved at 1.31% percentage of total loans and even if they did take a significant reserve build, if you added $750 million to the reserve -- that's the most they could have without showing a loss for the quarter -- you build it to 1.71% [of loans]. That's still at the light side.