Ahead of the Bell: Northeast Banks

An analyst wrote in a note to clients Wednesday that the valuations of regional banks with operations focused in the Northeast are likely to come under pressure in the coming months as the economy continues to weaken.

Friedman, Billings, Ramsey & Co. analyst James Abbott said Northeast banks have held up relatively well compared with other regions amid perception that problems weren't as bad in the area. But with the financial services sector melting down in recent months and likely putting pressure on credit losses in the future, Abbott said the premiums of shares of Northeast banks are likely to shrink.

"We expect Northeast valuations will come under significant pressure, narrowing the gap between banks in the Northeast versus those in the West," Abbott wrote in the note.

With unemployment expected to rise in many Northeast states, especially New York, New Jersey and Connecticut, Abbott said he expects the rate of loan defaults and the severity of those defaults to increase, leading to more loan losses at banks in the region.

In the note, Abbott said the Northeast is in the earlier stages of economic deterioration than other regions, especially the West, meaning downside risk to earnings and stock prices could be meaningful.

Abbott rates both Astoria Financial Corp. and M&T Bank Corp. as "Underperform" because their weak capital bases coupled with expected loan losses could require the banks to reduce assets or raise new capital. The market for banks to raise new capital during the ongoing credit crisis has essentially evaporated.

Both Hudson City Bancorp Inc. and Signature Bank are rated "Outperform" by Abbott because of their strong capital and liquidity bases. Abbott noted that each also can expand and the pair have less risky portfolios than some of their peers. Despite their strength, Abbott said all banks will be susceptible to some increase in credit losses because of the downturn.