5 Banks Most Vulnerable to New Housing Meltdown

NEW YORK ( TheStreet) -- Housing prices keep tumbling, and that means more trouble for banks.

The latest grim housing data comes from the S&P/Case Shiller home price indices, which set a new low since the recession began. According to the index, home prices have fallen by 5.1% in the past year and are back to mid-2002 levels.

A separate report from Standard & Poor's released May 24 estimates total cumulative loan losses to the U.S. banking sector could increase by $70 billion to $80 billion if the housing market were to experience what the report calls a "double dip," which it defines as a 15% drop in housing prices between now and December of next year, along with a rise in mortgage rates to 6.5% and a drop in residential construction.

That $70 billion to $80 billion estimate does not include losses to banks' mortgage backed securities portfolios, which comprise roughly 11% of total assets for the largest U.S. banks, according to S&P.

Banks' exposure to the residential housing market has increased dramatically over the past three decades, S&P data show. In 1984, residential real estate loans made up just over 15% of bank loans. That percentage peaked at 42% in 2005 and has come down only slightly since then--to 37% at the end of 2010.

Banks are vulnerable to housing price declines because they may be forced to mark down loans to reflect the lower home prices.

We looked at the largest 15 bank holding companies to see which ones had the largest one to four family loans as a percentage of total assets, and here were the five names with the most exposure. The numbers come from the Federal Reserve via SNL Financial.

Interestingly, Bank of America ( BAC) does not make the list. Analysts argue the bank has far and away the largest exposure to "putbacks" of mortgage backed securities (MBS), an area where exposure will clearly be worse if housing deteriorates further. Putbacks, or repurchases, are where banks are forced to buy back loans they put into MBS because they were fraudulent or otherwise didn't meet the criteria originally promised to bond investors.

Speaking at an investor conference Wednesday, Bank of America CEO Brian Moynihan told analysts the bank will not need to raise additional capital. Nonetheless, Bank of America shares tumbled more than 4% Wednesday in a broad market selloff driven by continued weak economic data.

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5. PNC Financial Services ( PNC)

One to four family mortgage loans as a percentage of total assets: 19.8

Analysts are generally very bullish on PNC, ranking it 4.57 on a scale of one to five, according to consensus data from Bloomberg.

A recent report from Sandler O'Neill following PNC's first quarter earnings report argues the bank "delivered a standout performance" in a difficult quarter for the banking industry.

"The quarter itself was strong on several fronts, management came across as very confident on full-year guidance, we are increasing our forward expectations, and the company has preserved more revenue momentum than its peers have," Sandler's analysts wrote, adding that "PNC leaves the first quarter having further distanced itself from most regional banks and taken a place among the few unique, positive surprises of the earnings season. We continue to think very highly of the story, we find the valuation compelling, and we reiterate our BUY rating," they wrote.

According to Sandler's report, PNC management projects distressed assets will drop by 25% in 2011, which is roughly the same rate as the previous year. "Excluding distressed portfolio runoff, modest loan growth is expected in 2011, with most of the increase coming from commercial loans," Sandler's report states.

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4. BB&T Corp. ( BBT)

One to four family mortgage loans as a percentage of total assets: 22.3

Analysts surveyed by Bloomberg rank BB&T 15th out of the 19 banks in the S&P 500, giving it a consensus rating of 3.3 out of 5.

BB&T's first quarter earnings were "very disappointing," according to a report from Sterne Agee, both from a credit quality and revenue perspective.

"Problem asset levels remain exceedingly high despite management's more aggressive asset disposition program," wrote Sterne Agee analyst Todd Hagerman.

Nonetheless, Hagerman has a "buy" on BB&T, arguing to Winston-Salem, N.C.-based institution arguing credit is "nearing an inflection point." He also believes "materially lower environmental costs and improving loan demand" suggest the shares are favorable from a risk/reward perspective.

Speaking at a May 24 conference hosted by Barclays Capital, BB&T CFO Daryl Bible said BB&T's mortgage business makes up about 7% of revenues, with the largest segment, "community banking," accounting for 60%.

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3. Regions Financial ( RF)

One to four family mortgage loans as a percentage of total assets: 22.5

Birmingham, Ala.-based Regions ranks 17th out of 19 banks in the S&P 500 in terms of its attractiveness to analysts, who rank it 2.85 on a scale of one to five, according to Bloomberg consensus figures.

Regions has nearly $30 billion in mortgage loans, about 2.3% of which are in foreclosure and 1.6% are 30-89 days past due.

Regions Financial is the twelfth largest bank in the country with $95 billion in deposits, according to Stifel Nicolaus, which notes in a report that Regions has grown "dramatically" during the past five years through mergers with Union Planters in July 2004 and AmSouth in November 2006. Regions serves customers in 16 states across the South, Midwest, and Texas, and through its subsidiary, Regions Bank, operates 1,774 banking offices and a 2,162-ATM network. Its investment and securities brokerage, trust and asset management division, Morgan Keegan & Company Inc., operates out of 325 different offices.

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2. SunTrust Banks ( STI)

One to four family mortgage loans as a percentage of total assets: 27.1%

SunTrust has 5.7% of its one to four family loans in foreclosure and 1.7% are between 30 and 89 days overdue.

Analysts surveyed by Bloomberg rank SunTrust shares 14th out of the 19 banks in the S&P 500, assigning it a rating of 3.5 out of 5.

Sterne Agee analyst Todd Hagerman rates SunTrust "neutral," arguing that while shares do not look "terribly expensive," at 1.2 times tangible book value, "the valuation is beginning to fully capture the improving fundamentals, while SunTrust's core profitability and ongoing credit leverage materially falls short of other large bank peers."

Hagerman described management outfook as "favorable" in a recent report. "While the company's recent return to profitability will continue, the principal earnings drivers will likely include higher reserve release and a stable margin, as well as ongoing expense control," he wrote, adding that he expects net charge-offs to "remain elevated as delinquency levels, although trending lower, have largely stabilized in the last couple of quarters."

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1. Wells Fargo ( WFC)

One to four family mortgage loans as a percentage of total assets: 28.2%

The smallest of the four giant U.S. banks, Wells Fargo may be the most directly exposed to the U.S. consumer, as it has significantly smaller investment banking operations than Citigroup ( C), JPMorgan Chase ( JPM) or Bank of America, and it has a smaller international presence than those institutions.

Wells Fargo has over 70 million customers, serving one in three American households, according to recent comments by CEO John Stumpf, speaking at a recent conference hosted by Barclays Capital. Stumpf said Wells Fargo has 9,000 stores in all 50 states.

"We have more stores and serve more communities than any other U. S. bank," he said.

Wells Fargo's first quarter results were a disappointment, according to Oppenheimer analyst Chris Kotowski, who nonetheless maintains an "outperform" on the stock.

"It's the A student who got a B- on the first quiz of the semester, but there's still lots of time to raise the grade," he wrote in a recent report.

>>To see these stocks in action, visit the 5 Banks Most Vulnerable to New Housing Meltdown portfolio on Stockpickr.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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