Analyst foresees growing weakness at Calif. banks

Weakness in the California economy is spreading beyond residential housing to areas including the commercial real estate sector, creating more challenges for many Western banks, said RBC Capital Markets analyst Joe Morford in a note to clients Thursday.

"In recent quarters, the larger residential construction lenders have faced the dual challenges of slowing growth and rising credit costs," Morford said. "Now we are increasingly seeing home equity credit problems, and we remain very cautious about commercial real estate and commercial and industrial loans, given that these tend to be much larger components of the banks' loan portfolios."

Morford expects banks with significant California-based residential construction loan exposure to record substantial write-downs and losses, as appraisals come in well below what the banks have projected on their books _ trends that will likely continue and may even worsen, he said.

Banks with high concentrations in overbuilt markets such as Sacramento and San Diego are particularly at risk, Morford said. Umpqua Holdings Corp., East West Bancorp Inc., Central Pacific Financial Corp., and Capital Corp. of the West have already reported large increases in problem construction loans, and Morford expects there will be more problems to come.

Banks such as Wells Fargo & Co., JPMorgan Chase & Co. and Bank of America Corp. are also increasingly facing problems with their home equity loan portfolios in the region.

Despite near-term risk in the sector, Morford continues to recommend Wells Fargo, Zions Bancorp, SVB Financial Group and UCBH Holdings Inc. because of their strong management teams, which should help them successfully navigate the current credit cycle.

Umpqua Holdings fell 32 cents to $12.01 in midday trading. East West Bancorp shares dropped 15 cents to $7.23, after hitting a new low of $6.94 earlier in the session.

Central Pacific lost 39 cents, or 3.4 percent, to $11.03. Shares have traded between $10.33 and $35 in the past 12 months.

Bucking the trend, Capital Corp. of the West added 2 cents to $3.54.