Regional bank stocks aren't the haven that investors hoped they would be -- as shares of Cleveland-based KeyCorp demonstrated Wednesday.
KeyCorp stunned investors late Tuesday by warning that loan losses would surge this year. Its shares plunged $2.29, or 10.4%, to $19.66 on Wednesday, their lowest since 2000.
The news also walloped shares of other regional banks, including Atlanta-based SunTrust Banks, which slid 4%; Birmingham, Ala.-based Regions Financial, down 5%; and Comerica Inc. of Dallas, down 3.8%. Beverly Hills-based City National Corp. fared better but still lost ground, off 2.4%.
Many regional bank issues held up comparatively well last year while mega-banks such as Citigroup Inc. were slammed by sub-prime mortgage losses and the shock effects from Wall Street's credit crunch. The regional banks were viewed as a potential refuge because the companies hadn't engaged in some of the high-risk lending practices that landed bigger banks in hot water.
But as the housing crisis has persisted and the economy has weakened, troubles in home-loan portfolios have bled into auto loans, credit cards and other areas, said Michael Andrews, a banking analyst at research firm SNL Financial.
KeyCorp said it would recognize net loan losses this year amounting to 1% to 1.3% of total loans, up from its previous estimate of 0.65% to 0.9%. The bank cited home-improvement and student loans as two sectors facing "elevated" losses.
"Regionals are suffering a backlash because people saw them as more conservative investments and as being more insulated from asset-quality deterioration than they really are," Andrews said.
Among the nearly 600 banks that SNL tracks, the percentage of nonperforming loans -- debt on which the borrower is significantly behind -- to total loans has more than doubled in the last year, to 1.37% in the first quarter. And return on equity, a basic measure of profitability, has been cut in half in the last two quarters.
With loan woes spreading in the banking system, many regional bank stocks have fared worse than Citigroup's shares since the second quarter began. That is weighing on the BKX index of 24 major bank issues.
The index closed Wednesday at 75.64, just above its five-year closing low set March 10.
Though Wall Street doesn't expect bank loan problems to match those of the late-1980s savings and loan crisis, the selling pressure on regional bank shares shows investors still are coming to grips with the prospect of heavier loan losses.
"I don't believe we've hit a bottom yet" in the stocks, Andrews said.