Slow Improvement At Zions, M&I Shows Strain On Regional Banks

Date : 07/20/2010 @ 1:47PM
Source : Dow Jones News
Stock : First Horizon National Corp. (FHN)
Quote : 20.41  0.2 (0.99%) @ 9:48AM

Slow Improvement At Zions, M&I Shows Strain On Regional Banks

Zions Bancorporation (NASDAQ:ZION)
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Loan books at regional banks are getting better. But not fast enough.

That is the message investors sent Tuesday after seeing second-quarter earnings from two regional lenders, Zions Bancorp. (ZION) and Marshall & Ilsley Corp. (MI). Both banks reported losses and disclosed their books of risky commercial real-estate loans improved only slightly over this year's first quarter.

Zions reported a loss of $135 million after the market closed Monday. The Salt Lake City-based lender's $1.96 billion in nonperforming loans--or loans at high risk of becoming uncollectable--fell modestly over the first quarter, but still remain higher than three quarters ago. The bank's core revenue also shrunk as total loans fell for the fourth straight quarter.

M&I, based in Milwaukee, reported a net loss of $174 million and said its troubled loans continued to improved--a key issue for a bank that made big bets on construction loans and has now reported a loss in eight of the nine last quarters.

Investors, though, were expecting more hopeful signs from M&I's loan books. Like nearly all other large U.S. banks, M&I also said its total outstanding loans--a source of current and future revenues--have fallen again, down 14% in the last year.

Stock in Zions fell 9.2% to $19.46 in midday trading. Shares in M&I also fell 9.2%, to $7.00.

Both stocks have fared well this year, up 52% and 28%, respectively, since Jan. 1--and the current slide of both stocks likewise illustrates investors' growing unease with the condition of regional banks' businesses, and loan books.

As the U.S. economy reveals an increasingly stunted recovery, regional banks are being squeezed. Their loan troubles are easing very slowly even as they face a lack of new sources of businesses, like companies that want to borrow money or expand operations.

Emerging results from regional banks also suggest the midsize lenders could suffer for quarters to come under a slow drip of losses from commercial loans, especially commercial real estate.

The results from Zions and M&I weighed on other regional shares Tuesday, including stocks in banks like Regions Financial Corp. (RF), SunTrust Banks Inc. (STI) and Fifth Third Bancorp. (FITB). The KBW Regional Banking Index was down 1.7% to $46.34.

Executives at both Zions and M&I emphasized that their levels of nonperforming loans are falling.

"We are encouraged with the decline in nonperforming lending-related assets," said Harris H. Simmons, Zions' chairman and chief executive officer, in a statement. "Notably, more than 80% of the improvement...occurred in construction and term commercial real estate."

But where Zions saw improvement, investors see red flags. The Utah bank has $2.5 billion in nonperforming assets, up from $2.1 billion a year ago.

Wisconsin-based M&I's $2.2 billion in nonperforming loans fell for the fourth straight quarter, and have fallen a total of 7% since the first quarter of 2009.

As the financial crisis raged two years ago, investors widely assumed that regional lenders would take huge lump-sum losses from belly-up loans, especially those tied to housing developments and other construction project. Since then, regional banks have shown an ability to stretch those likely losses across many quarters--in part by restructuring loans, and in part because commercial property markets aren't suffering from the heavy oversupply of for-sale properties that bankers experienced during the property crisis of the 1990s.

-By Marshall Eckblad, Dow Jones Newswires; 212-416-2156;


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