Regional Banks May Benefit From Equity Plan

Large regional banks are likely to get a boost from the Treasury's decision to pump $250 billion of badly needed equity into the troubled banking sector.

The federal government on Tuesday said it would allocate the funds from the $700 billion troubled asset relief program, or TARP, in a bid to improve investor confidence in the banking system by jump-starting the credit markets. Treasury Secretary Henry Paulson said early Tuesday that nine major financial institutions have already agreed to participate in the voluntary program, in which Treasury will buy preferred shares in the institutions.

"Although no definitive plans were announced regarding specific names in the regional space that will benefit, we believe it is just a matter of time before we see announcements benefiting the regionals in light of only 50% of the capital injection being used on the ... largest banks and fiduciary processors, so we expect the remainder will be applied to the regional bank space," writes Citigroup analysts Keith Horowitz and Greg Ketron.

Since the plan should have "significant impact" on the banking sector, Citigroup (C) on Monday upgraded 12 banks to buy-rated stocks, including Comerica (CMA), Regions Financial (RF), SunTrust (STI), Bank of America (BAC), BB&T (BBT), First Horizon (FHN), Fifth Third (FITB), Huntington Bancshares (HBAN), KeyCorp (KEY), Marshall & Ilsley (MI), M&T Bank (MTB), and Zions (ZION), the analysts wrote in an industry note. Citi also raised its rating on U.S. Bancorp (USB) to a hold.

"This is the most significant development to date in the sense that in one fell swoop Treasury has moved to address the greater issues of the day facing banks -- capital, liquidity in the form of depositor protection and the ability to issue debt," the note said. "Also unlike the prior plans which seemed more concerned about 'moral hazard' risks, this plan seems to more focused on encouraging private capital to start to flow back into the system."