This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Bank Stocks to Avoid as Credit Worries Mount

Like a pinstripe-clad Roger Daltrey, bank investors were wondering who's next Wednesday after two big banks reported a troubling spike in shaky loans.

  • Junk-Bond Funds Face Growing Risk of Telecom, Tech Defaults
  • Credit Quality Issues Rear Their Ugly Heads Again

    First Union (FTU) and Bank of America (BAC) shook up the financial sector with cautionary words Tuesday evening about their exposure to risky loans. Given that worries about deteriorating credit quality have hamstrung bank stocks for months, it didn't take long for the sector to wince. First Union shed more than 8% Tuesday; Wednesday, Bank of America dropped 9%, leading a 4% slide in the S&P Bank Index.

    The bad news sent investors scouring their portfolios for lenders whose loan-loss and nonperforming-asset trends could point to emerging problems. Using those and other guidelines, three analysts shared their thoughts on which bank stocks might be vulnerable.


    Bank One (ONE), still plodding through a major restructuring, leads the list of credit-risk-exposed stocks compiled by analyst Jennifer Thompson of Putnam Lovell. "Bank One is not only seeing pressure on the commercial side, but has indicated that consumer loss rates are trending up," says Thompson, whose firm rates Bank One a hold and hasn't done any underwriting. "They also have a fairly large auto-lease portfolio, which could continue to feel pressure as well." Bank One stock fell 5% Wednesday.

    Huntington Bancshares (HBAN) is another bank to avoid, Thompson says, noting an auto lease portfolio that could spur a second consecutive writedown in the fourth quarter. (She rates Huntington a hold, and her firm hasn't done any underwriting for the bank.) Huntington dropped 1.4% Wednesday.

    SunTrust (STI) and Wachovia (WB), both of which "have seen an increase in problem assets," are also stocks to keep an eye on, says Thompson. (Both stocks get the hold rating at Putnam, and the firm hasn't underwritten for either bank.) "In general, the areas that a lot of these banks are feeling pressure in are exposures to health care, textiles, the theater industry and agribusiness," adds Thompson. SunTrust dropped 4.2% and Wachovia 6.8% Wednesday as regional bank stocks took a heavy drubbing.


    Though credit quality issues have loomed over bank stocks since as least mid-June, when historically conservative Wachovia roiled the sector with a profit warning, investors' anxiety over loan defaults has only risen as evidence of a nationwide economic slowdown continues to filter in.

    Kathy Shanley, fixed-income analyst with Gimme Credit in Willamette, Ill., says she'd avoid Comerica (CMA), whose stock fell two weeks ago on the announcement of its plan to buy California-based Imperial Bancorp (IMP), whose credit-quality track record is mixed. Shanley thinks Imperial's exposure to residential tract construction could be worth watching, as could the bank's $400 million emerging growth portfolio.

    Brock Vandervliet, banks analyst at Lehman Brothers, has assessed exposure to syndicated loans, which is particularly timely considering the big hit First Union and Bank of America will take on their syndicated deal with troubled Sunbeam (SOC). (A syndicated loan is one shared by three or more institutions.)

    Vandervliet said the risks of exposure to syndicated credits are well established, and recent events "are just confirmation that investor sensitivity should remain pretty high." Accordingly, he says Hibernia (HIB), Pacific Century (BOH) and UnionBanCal (UB) will all have "some rough sledding in the near term." Of those names, UnionBanCal's exposure to syndicated credits is greatest. The banks' shares all fell fractionally Wednesday.


    Still, Vandervliet thinks the bank sector as a whole is being taken down for "problems that are concentrated" at a smaller group of banks.

    On that note, some analysts are pointing to banks with what they see as a better grip on credit issues. Even as influential Merrill Lynch analyst Judah Kraushaar cut earnings estimates on Bank of America Wednesday and noted "credit erosion taking place," he made some top recommendations for investors eager to stay invested in financials, including Citigroup (C), Chase (CMB), Mellon (MEL) and Wells Fargo (WFC). Those stocks dropped between 1% and 4% Wednesday.

    And perhaps even credit worries can have a silver lining. With all the recent hand-wringing over telecom debt, Vandervliet says Hibernia, for one, has taken the rare step of laying out its telecom exposure, which appears to be minor.

    "Banks have historically been reticent to provide that kind of detail," the analyst says. "Now that the market is throwing the baby out with the bath water, this should prompt banks to give us more details about the industries they play in."

    Select the service that is right for you!

    Action Alerts PLUS
    Try it NOW

    Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    • Weekly roundups
    TheStreet Quant Ratings
    Try it NOW
    Only $49.95/yr

    Access the tool that DOMINATES the Russell 2000 and the S&P 500.

    Product Features:
    • Buy, hold, or sell recommendations for over 4,300 stocks
    • Unlimited research reports on your favorite stocks
    • A custom stock screener
    • Upgrade/downgrade alerts
    Stocks Under $10
    Try it NOW

    David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    • Weekly roundups
    Dividend Stock Advisor
    Try it NOW

    Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

    Product Features:
    • Diversified model portfolio of dividend stocks
    • Alerts when market news affect the portfolio
    • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
    Real Money Pro
    Try it NOW

    All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

    Product Features:
    • Real Money + Doug Kass Plus 15 more Wall Street Pros
    • Intraday commentary & news
    • Ultra-actionable trading ideas
    Options Profits
    Try it NOW

    Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

    Product Features:
    • 100+ monthly options trading ideas
    • Actionable options commentary & news
    • Real-time trading community
    • Options TV
    To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
    Submit an article to us!


    DOW 17,959.44 +154.64 0.87%
    S&P 500 2,078.54 +7.89 0.38%
    NASDAQ 4,781.4240 +16.0440 0.34%

    Brokerage Partners

    Rates from

    • Mortgage
    • Credit Cards
    • Auto

    Free Newsletters from TheStreet

    My Subscriptions:

    After the Bell

    Before the Bell

    Booyah! Newsletter

    Midday Bell

    TheStreet Top 10 Stories

    Winners & Losers

    Register for Newsletters
    Top Rated Stocks Top Rated Funds Top Rated ETFs