Merrill: Regional Banks in 'Capitulation Mode'

Friday, June 20, 2008 9:22 AM

(Reuters) - U.S. large-cap regional banks' stocks now appear to be in "capitulation mode" and will likely trade below fair value in the near term as more dividend cuts and capital raises, high credit risk and an uncertain earnings outlook all weigh on their share prices, an analyst at Merrill Lynch said.

Analyst Edward Najarian said he does not expect credit metrics to recover until 2010 and forecast more dividend cuts and capital raising at banks, including Bank of America Corp and Wachovia Corp, in the second half of this year.

Najarian also slashed his earnings estimates by an average of 22 percent for 2008 and 19 percent for 2009. He said the estimate cuts were largely due to higher loan losses at banks, as well as an increase in loan loss reserve building.

He said Bank of America and Wachovia may miss second-quarter Wall Street estimates by the greatest percentage.

The analyst expects the median net charge-off ratio of large regional banks to triple to 1.14 percent in 2008, while loan loss provision-to-loan ratio is expected to increase to 1.87 percent in 2008 from 0.57 percent a year ago.

Najarian expects dividend cuts or capital raising, or both, at Bank of America, Regions Financial Corp (RF.N: Quote, Profile, Research, Stock Buzz), SunTrust Banks Inc (STI.N: Quote, Profile, Research, Stock Buzz) and Wachovia in the second half of the year.

"We note that Bank of America, Regions Financial and Wachovia have already raised capital since the first quarter, and we think future attempts to raise additional capital will likely result in further downward pressure on the stocks," Najarian said.

Shares of Bank of America were down nearly 3 percent to $27.35 in trading before the bell, after closing at $28.14 Thursday on the New York Stock Exchange. Wachovia shares were down more than 4 percent in pre-market trade, after closing at $17.77 Thursday. ... 06212.html