U.S. mortgage woes could hit regional banks

NEW YORK, April 2 (Reuters) - Rising defaults on subprime home loans spelled trouble for New Century, but rising defaults on another kind of mortgage considered less risky could mean trouble for many regional banks' shares in coming weeks, analysts and portfolio managers said on Monday.

Shares of M&T Bank Corp. (MTB.N) dropped more than 8 percent on Monday, after the bank said it was writing down mortgages in its portfolio of loans to people unable to document regular income, known as "Alt-A mortgages."

Such mortgages are considered less risky than subprime ones, which were the mainstay of New Century Financial Corp. NEWC.PK, New Century filed for bankruptcy protection on Monday, the latest casualty amid a surge of homeowner defaults.

Subprime borrowers have weak credit histories as opposed to simply limited documentation.

But if 'Alt-A' home loans are broadly weakening, shares of banks and finance companies including SunTrust Bancorp., (STI.N), Capital One Financial Corp. (COF.N) and BB&T Corp. (BBT.N) could get hit in coming weeks, said Frank Barkocy, director of research at asset manager Keefe Managers LLC in New York.

Regional banks in general face real profit headwinds in coming months, said Ralph Cole, a portfolio manager at Ferguson Wellman Capital in Portland. Longer-term interest rates are low relative to short-term interest rates, which squeezes lenders' margins.

Meanwhile, the credit quality of banks' portfolios is likely to weaken from its recent strong levels, Cole said.

"Credit's been as good as it gets, and now some of those performance numbers are likely to change," he said.

So far, regional bank stocks have stayed remarkably stable considering their possible difficulties. The S&P 1500 Regional Banks sub-industry index .15GSPBNKS has risen about 1.6 percent over the last year, though that's not as good as larger banks, which are up about 5.6 percent over the same period.

But concerns about banks' share prices have spurred Ferguson Wellman to invest more in non-lending financial stocks, like life insurers, Cole said.

Large regional banks tend to trade at about 13 times their expected 2008 earnings now, said Jennifer Thompson, an analyst at Oppenheimer in New York. That multiple could contract to 12 or 11 in the coming months amid mounting concerns about credit, she added.

The S&P 1500 Regional Banks sub-industry index fell 1.75 percent on Monday.

Shares of SunTrust traded down 2.4 percent, shares of Capital One fell 2.5 percent, and shares of BB&T fell 1.8 percent.

DEFAULTS AND BANKRUPTCY

So far the biggest pain as the residential real estate boom of recent years has turned to bust has been felt by subprime lenders. When housing prices stopped surging last year and rates on many adjustable-rate mortgages adjusted higher, delinquencies jumped.

Even with difficulty in the residential real estate market, some regional banks may still be worth buying, said Amy LaGuardia, a portfolio manager at Barrett Associates in New York.

Banks in growing areas like Texas and the Pacific Northwest and banks that have more exposure to commercial lending than residential mortgages may be a good bet, she added. She declined to identify specific banks.

But anyone looking for bargains should be careful now, Keefe's Barkocy said. Stocks of many good banks could get tarred with the same brush as more troubled banks, pulling their shares down.

"At this point, even if you were right, you could end up being wrong," Barkocy said.