Five regional banks seek $8.2B after tests-WEB ONLY

Five of the nation’s largest regional banks, including four with dozens of branches and hundreds of employees in Indiana, are vulnerable to a worsening recession and need to raise a total $8.2 billion in new capital based on results of government “stress tests” released yesterday.

The two regional banks based in the Southeast, Regions Financial Corp. and Suntrust Banks Inc., got bigger capital-raising mandates than the three based in the Midwest – Fifth Third Bancorp, KeyCorp and PNC Financial Services Group Inc. Minneapolis-based U.S. Bancorp and BB&T Corp. in Winston-Salem, N.C., do not need to raise additional money.

The government tests found that Birmingham, Ala.-based Regions Financial Corp. needs to raise $2.5 billion; Atlanta-based SunTrust needs $2.2 billion; Cleveland’s KeyCorp needs $1.8 billion; Fifth Third in Cincinnati needs $1.1 billion; and Pittsburgh-based PNC needs $600 million.

Regions, Fifth Third, PNC and KeyCorp. all have a large presence in central Indiana.

Regional banks can be bellwethers of the health of their local economies, making loans to businesses and industries in the region, financing development projects and employing thousands of people. Many regional banks hold concentrations of commercial real estate loans – a hot spot of potential trouble – that make them vulnerable to weakness in their geographic areas. If the recession deepened, defaults on the high-risk loans could soar. Companies already have shut down and vacated shopping malls and office buildings that were financed by the loans.

The seven regional banks each received an injection of several billion dollars under the federal financial bailout program, and several have said they believe they’ll be in a position to repay it soon. The banks said yesterday they would raise the required funds through the capital markets, without additional government aid, and in some cases by possibly selling assets. They are required to submit capital-raising plans to the regulators by June 8.

Regions Financial said it has committed to raise the prescribed $2.5 billion, but “questions whether it should be required to raise additional capital now to provide for a two-year adverse economic scenario,” especially since Federal Reserve Chairman Ben Bernanke said this week he expected the economy to start recovering this year.

Analysts and investors have been eager to see how the seven regional banks fared on the government’s tests of their financial conditions. The results could spark a round of mergers, with stronger institutions absorbing weaker banks that the tests say need more capital. Disappointed stock-market investors could push their prices so low that they look like bargains to larger banks.

Independent banking consultant Bert Ely said it’s likely a handful of the banks will be taken over by the end of the year. Regional banks with depressed stock prices are the most likely takeover targets, and foreign banks looking to expand their U.S. operations are the probable buyers, he said.

Another possibility: Banks told to raise capital in the private markets may be forced by potential investors to join with stronger banks, said Wayne Abernathy, a former Treasury official now with the American Bankers Association.

The most vulnerable banks are those with large loan holdings in areas with the highest unemployment and the most severe fallout from the subprime mortgage crisis, like Michigan, Ohio, California and Florida, said Joe Gladue, an analyst who follows smaller regional banks at investment bank B. Riley & Co. in Philadelphia.

SunTrust is strongly concentrated in Florida, where conditions for both residential and commercial real estate have been especially bleak. And Regions Financial and Fifth Third also have been notably stung by losses on commercial real estate loans in that state.

Unlike the home-loan disaster, which appears to be in its final stages, “it seems there’s probably more pain to come” in the commercial real estate business, Gladue said.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., last year told banks that if they have concentrations of commercial real estate loans, they should take steps to strengthen their risk controls, and maintain capital cushions and reserves against loan losses.

The stress tests were designed to gauge whether any of the nation’s 19 largest banks, including the seven regionals, would need more capital to survive a deeper recession. It turns out many of the banks do: Ten of the 19 need a total of around $75 billion in new capital to withstand losses under that scenario.

Among the 10 banks that need to raise more capital, Bank of America Corp. needs by far the most – $33.9 billion. Wells Fargo & Co. needs $13.7 billion, GMAC LLC $11.5 billion, Citigroup Inc. $5.5 billion and Morgan Stanley $1.8 billion. None of these banks has a significance banking presence in Indianapolis.

Among the big national banks that the government did not ask to raise more capital was JPMorgan Chase & Co., which has more than 2,000 employees and 90 branches in central Indiana.

The tests put the banks through two scenarios: one that reflected expectations about the current recession and another that envisioned a recession deeper than what analysts predict.

The heavy holdings of commercial real estate loans can even give regional banks a riskier profile than some big Wall Street banks – which carry bigger portfolios of securities such as mortgage-backed bonds that already have plunged in value. The stress tests treated those securities as more durable than they did loans.

Some analysts fear that the commercial real estate market could topple into the worst crisis since the last great property bust of the early 1990s. Delinquency rates on loans for hotels, offices, retail and industrial buildings have risen sharply in recent months and are likely to soar through the end of 2010 as companies lay off workers, downsize or close.