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5 regional banks must raise $8.2B after tests

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Five of the nation’s largest regional banks 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 Thursday.

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.

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 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.

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. Analysts and investors have been eager to see how the seven regional banks fared on the government’s tests of their financial conditions.

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.

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.

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.

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.

Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington, sees potential wide fallout from the stress tests for the thousands of smaller banks in the U.S. that weren’t put on the government’s treadmill. The tests used tightened criteria for gauging how much collateral banks have remaining to offset losses on loans.

“What does it mean for community and regional banks?” Petrou said in prepared remarks for a speech to bankers’ groups meeting in New Hampshire Thursday. “Trouble when your (government) examiners come calling.”

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.

© 2009 Associated Press. Displayed by permission. All rights reserved.

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