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Regionals Must Deliver Better Balance Sheets

NEW YORK ( TheStreet) -- The regional banks have surged along with the rest of the financial sector so far in 2010, and now it's time to see if the results can keep up with the stocks.

The view that credit costs reached an inflection point in the first quarter fed the recent rally in the sector, along with an anticipated mitigation of losses and increasing confidence about the overall recovery in the U.S. economy, but the run-up has made the individual stocks that much more vulnerable to any disappointments in the numbers. With the KBW Bank Index (BKX), which includes twenty of the largest U.S. regional banks in addition to the big four money-center banks, up almost 30% through Thursday vs. a gain of around 6% for the S&P 500 index, the pressure is on. The smaller regionals have outperformed as well with the KBW Regional Banking index (KRX), featuring another 50 companies, up some 23% over the same period.

Specifically, investors will be looking at the level of loan loss reserve additions needed, which has crimped earnings power over the last two years. Minimal loan-loss provisioning will be the biggest potential lever in terms of sequential earnings improvement, analysts say. Wall Street will also want to see improvements in delinquency levels and declines in growth of nonperforming assets.

Banks' so-called normalized earnings, essentially profit trends before factoring in loan loss provisions and taxes, will also start coming into focus. Wall Street wants to get some clarity on when banks will be getting back to the core business of being banks, i.e. making loans and taking in deposits.

This will be more easily identified in the regional banks since they are not as diversified as the large money-center names -- JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C) -- which have multitude of capital markets businesses that contribute to the bottom line.

Large regional banks including BB&T (BBT - Get Report), Fifth Third Bancorp (FITB - Get Report), KeyCorp (KEY - Get Report), Regions Financial (RF - Get Report), SunTrust Banks (STI - Get Report), U.S. Bancorp (USB - Get Report), as well as many smaller names, will begin unveiling their first-quarter numbers the week of April 19, so the verdict will be in shortly and select names could start to break away from the herd.
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