Ahead of the Bell: Regional Banks

The need for increased loan-loss reserves as the economy continues to worsen led an Oppenheimer & Co. analyst on Monday to cut 2009 earnings estimates on more than 20 regional banks.

Oppenheimer analyst Terry McEvoy, in a research note, predicts regional banks will face mounting loan losses from already elevated levels and have to set aside further cash to protect against those losses.

McEvoy noted loan quality is declining across nearly all types of loans and that regional banks derive about 75 percent of their earnings from lending operations. If losses continue to mount, it will hurt bank profits, McEvoy wrote.

A continued weakening of the economy will play a central role in the mounting losses as unemployment continues to rise and home prices and the equity markets continue to fall, McEvoy said.

For most regional banks, earnings will also be diluted by recent capital investments from the federal government. Many regional banks are taking part in the government's $700 billion bank investment program being administered by the Treasury Department. The program calls for banks to receive additional capital in return for preferred stock and warrants to purchase common shares.

McEvoy said that until banks begin to use that capital to boost lending to quality borrowers, the interest costs will weigh down earnings.

The government enacted the program in hopes it would help spur lending amid the ongoing market turmoil that has seen banks stop lending to each other and many customers for fear of future, additional losses.

Bank executives do not appear willing to use the new cash to jump back into the lending markets quickly, McEvoy noted. Instead they may put the cash to use purchasing other, struggling banks to boost deposit bases and operations, he said.