Regional Banks: Earnings Preview

NEW YORK ( TheStreet) -- It's time for the regional banks to move to center stage, and investor concerns about their results aren't likely to change much from what Wall Street has prioritized when it comes to their bigger brethren: Credit quality is king.

PNC Financial Services ( PNC), Fifth Third Bancorp ( FITB), Keycorp ( KEY) and Capital One ( COF) are among the institutions slated to report their fourth-quarter numbers on Thursday, and signs of improvement in loan loss trends in both the consumer and commercial sectors will be of paramount importance when the press releases hit the wire.

The four main money-center banks -- JPMorgan Chase ( JPM), Citigroup ( C), Bank of America ( BAC), and Wells Fargo ( WFC) -- have already reported their numbers, as have a good number of other high profile names such as Bank of New York Mellon ( BK), Northern Trust ( NTRS), State Street ( STT) and U.S. Bancorp ( USB).

A few regional-tier banks, including M&T Bank ( MTB), Marshall & Ilsley ( MI) and smaller banks, First Horizon ( FHN) and Hudson City Bancorp ( HCBK), have also released their quarterly results, and many more will be doing so during the remainder of this week and the next.

So far, the numbers have shown that -- while costs are still at record levels and continuing to rise -- credit costs are finally showing signs of stabilizing. In particular, of the banks that have reported so far, there is evidence that the overall growth in nonperforming loans and early stage delinquencies is beginning to slow.

For example, First Horizon, a Memphis, Tenn.-based regional bank with large exposure to residential mortgages, reported a wider than expected loss for the quarter on Friday, but said that the growth in non-performing assets and charge-offs had slowed for the third and second consecutive quarters, respectively.

Also, Marshall & Ilsley, which posted a loss as well on Wednesday, said that early stage delinquencies and nonperforming loans declined in the fourth quarter, continuing a pattern from the third quarter.

So with reporting season in full swing over the next two weeks, regional and small community banks will be worth watching to see if similar credit trends manifest in their own results.

"As you can kind of move down the spectrum the asset quality might get a bit worse just because a lot of those banks have been a lot slower to aggressively reserve and charge off loans," says Brad Milsaps, an analyst at Sandler O'Neill & Partners, who covers small-cap banks mainly in the Midwest and Texas.

Milsaps cautioned that bank credit quality could experience a lull through the first half of 2010, but as we move throughout the year, "we could see things move up again in late cycle loan categories," such as C&I commercial and industrial and CRE commercial real estate. He tempered his comments by adding that the severity of the CRE losses "probably won't be anywhere near" residential losses.

Many smaller banks have more concentrated exposure to commercial and commercial real estate loans in their portfolios. Residential and commercial construction loans have been some of the most stressed portfolios of late.

As a result, earnings at the regional level may not be very pretty as these banks are still dealing with realized and potential problem loans. Oppenheimer analyst Terry McEvoy in a research note published on Jan. 12 that he estimates 41% of the regional and super-community banks will report negative earnings for the fourth quarter. That figure compares to the third quarter, when 46% of banks in that category lost money.

But Credit Suisse analyst Craig Siegenthaler recommended in a note last week that investors buy regional banks ahead of their earnings reports, particularly First Horizon and SunTrust Banks ( STI).

Fourth-quarter results "will bring improved EPS and capital ratio visibility following the peak in provisions driven by a decline in reserve builds, which should support an improvement in valuations from distressed levels," Siegenthaler wrote of the group's prospects.

But there was a caveat to Siegenthaler's optimism as he told investors to choose regional banks that have the lowest allocations to C&I loans and CRE loans and are instead overweight consumer and residential mortgage credit "as we believe these loan portfolios will experience improving credit quality faster."

Also Siegenthaler remains cautious on names such as Zions Bancorp ( ZION) and Synovus ( SNV) because he believes that both institutions will need to raise capital at some point this year.

SunTrust reports its quarterly results on Friday, along with BB&T ( BBT) and Huntington Bancshares ( HBAN). Zions is due to disclose its numbers on Monday, while Synovus reports on Friday, Jan. 28.

"As we look at 2010, we are encouraged by signs the economy is improving, as we have seen in the stabilization of our credit costs, particularly in the consumer businesses," Bank of America CEO and president Brian Moynihan stated on Wednesday when the nation's largest bank reported its results. As for its commercial portfolio, BofA said "criticized" loans had decreased and the growth of nonperforming loans slowed.

It'll be interesting to see if the same holds true for BofA's smaller regional and community counterparts. Where the individual stocks go from here likely depends on it.

--Written by Laurie Kulikowski in New York.

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