Regional Banks Slide on Bearish UBS Call

Regional bank stocks slumped Tuesday after UBS analysts said the sector was "poised for a pullback" because of earnings headwinds the firm sees gathering later this year.
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NEW YORK (

TheStreet

) -- Regional bank stocks slumped Tuesday after

UBS

said the sector was "poised for a meaningful pullback" because of earnings headwinds the firm sees gathering later this year.

"We continue to believe the pace of earnings recovery will fall well short of expectations," UBS analysts wrote in a research note to clients on Tuesday. "We think the recent rally and ensuing valuations are unsustainable, and the group is poised for a meaningful pullback."

Large and mid-size bank stocks under the investment bank's coverage list are currently trading at 17.4 times UBS' 2012 earnings estimates vs. historical forward multiples of 10-12 times, the note says.

UBS expects earnings at the regional banks to be held back by not only a fat credit tail in residential and commercial real estate but also the impact of balance sheet shrinkage, more muted margin expansion and lower overdraft fees on their ability to grow revenue, the note says.

UBS downgraded its ratings on

Huntington Bancshares

(HBAN) - Get Report

,

KeyCorp

(KEY) - Get Report

,

Regions Financial

(RF) - Get Report

, and

TCF Financial

(TCB)

to sell from neutral, and cut

Commerce Bancshares

(CBSH) - Get Report

to neutral from buy. UBS also trimmed annual earnings estimates for 2011 through 2014 by a median of 11% on a host of regional banks.

Regional banks

have surged roughly 30% this year, along with the rest of the financial sector, as investors hope that the worst of credit is behind the banks, but now the group is going to have to back up that perception with strong first-quarter numbers in order to hold those gains.

JPMorgan Chase

(JPM) - Get Report

is set to kick off bank earnings on Wednesday followed by

Bank of America

(BAC) - Get Report

on Friday. Within the regional bank sector,

First Horizon

(FHN) - Get Report

will be among the first to deliver its results when it reports on Friday.

In the near term, however, UBS is predicting the positive momentum in bank stock trading will continue as first-quarter results will likely meet Wall Street expectations, the note says. The analysts' estimates are only modestly below consensus estimates, unlike the more bearish view UBS took on profits for 2011 and beyond.

UBS analysts expect the median regional bank to post a 10% sequential earnings jump, given "seasonally stronger credit comparisons and top-line stability," the note says. "

Any retracement in stocks should be muted" as a result of first-quarter earnings.

"

We believe it will take another two to three quarters before investors begin to appreciate the sluggish recovery, and the group may not begin its retrenchment," until the second half of the year, the note says.

Huntington's shares fell nearly 7% on Tuesday to $5.62 on higher than average trading of 24 million. KeyCorp shares were down 4.8% to $7.94 after approximately 10 million shares changing hands. Regions Financial and TCF shares were falling 3.4% and 4%, respectively, while Commerce shares were off 3.4% to $40.63.

--Written by Laurie Kulikowski in New York.