Loans Expert

Stocks in once-beleaguered regional banks rose sharply Thursday after their loan books showed more evidence of returning to health, boosting investors’ confidence the worst of the economic crisis losses are over.

KeyCorp (KEY), Fifth Third Bancorp (FITB) and Comerica Inc. (CMA) each heartened investors, despite posting losses, by reporting flat or lower quarterly provisions as compared to three months ago. Provisions are dollars that banks set aside from earnings to absorb current and future loan losses. Fifth Third and Comerica reported lower actual losses from loans, while KeyCorp’s realized losses rose.

The three banks were generally up 7% to 10% through midday composite trading–in stark contrast to the stocks of the biggest U.S. banks, like JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC), which fell sharply after President Barack Obama vowed before lunchtime Thursday to limit the banks’ in-house investment activities. Obama said he’ll push for laws that curb banks’ abilities to take risk, which can juice profits.

Regional lenders don’t typically have the big investment banks or trading operations that Wall Street lenders have. Instead, regionals tend to function more like conventional stand-alone commercial banks, which collect deposits from consumers and businesses, and mostly make loans to other companies.

That focus on loans to companies had until recently hammered the banks’ stock prices. Most fell sharply last year as problems with loans to businesses followed bigger banks’ earlier massive losses from consumer loans like mortgages and credit cards. To some investors, Thursday’s reports from regional lenders suggested their problems with commercial loans are finally tapering off for good.

Not all regional banks’ results were so encouraging. PNC Financial Services Group Inc. (PNC) didn’t report the same improvements in credit.

At Cincinnati-based Fifth Third, “Fourth-quarter credit trends were better than expected,” said Kevin Kabat, the chief executive. “Our current expectation is for full-year 2010 net charge-offs to decline from those realized in 2009.”

His words were sweet music to the ears of bank investors, who have been hunting for signs from bankers that the worst days of the crisis–at least for lenders–have passed. Figuring out when banks’ loan books have bottomed is a tricky task since banks often post actual losses from loans long after problems first surface.

Banks must analyze their loans every quarter and set aside money for any losses they can expect the loans to generate, including those well into the future. According to age-old strategies of bank investing, flat or lower provisions are a key sign that banks have accounted for their worst losses.

That’s why it mattered little to investors Thursday that KeyCorp, Comerica and Fifth Third–a trio of banks exposed to troubled markets–each reported a quarterly loss.

Shares in Cleveland-based KeyCorp, which reported a $224 million fourth quarter net loss, were recently up 8.2% to $7.53, and are up about 36% since Dec. 31.

Fifth Third’s stock was recently up 8.6% to $12.28 after the lender posted a quarterly loss of $98 million; year to date, the shares are up about 25%.

Texas-based Comerica, which has markets in Michigan, Florida and Arizona, lost $29 million in the quarter. Its stock was recently up 9.2% to $36.64, and up about 23% year to date.

The sharp rise of all three shares pushed the KBW Regional Bank Index up 2.6% to $50.48.

   PNC's Credit Disappoints

Shares of PNC, one of the largest and strongest U.S. regional banks, fell sharply Thursday even though the Pittsburgh-based lender reported its fourth consecutive quarterly profit. Were it not for PNC’s timely 2008 acquisition of its crumbling rival National City Corp.–another Ohio-based lender–the bank would not have reported a loss during the entirety of the financial crisis thus far.

The bank earned $1.1 billion during the quarter, but its loan books showed less sign of improvement than did PNC’s competitors. Shares in PNC were recently down 5.1% to $55.75 but are up more than 4% year to date.

“The quarter wasn’t a bad one” for PNC, said Frank Barkocy, director of research at Mendon Capital Advisors Corp. But “it didn’t show the credit quality improvement that we saw at other regionals, where we saw more clear-cut indications of asset quality improvement.”

PNC’s provision rose over the prior quarter, as did its actual loan losses. As with nearly every other bank, PNC’s nonperforming loans–or those becoming uncollectable–also rose over the prior quarter.

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