Dozens of U.S. banks will fail by 2010: analyst

NEW YORK Fri Feb 1, 2008 3:39pm EST

NEW YORK (Reuters) - Dozens of U.S. banks will fail in the next two years as losses from soured loans mount and regulators crack down on lenders that take too much risk, especially in real estate and construction, an analyst said.

The surge would follow a placid 3-1/2 year period in which just four banks collapsed, all in the last year, RBC Capital Markets analyst Gerard Cassidy said in a Friday interview.

Between 50 and 150 U.S. banks -- as many as one in 57 -- could fail by early 2010, mostly those with no more than a couple of billion dollars of assets, Cassidy said. That rate of failure would be the highest in at least 15 years, or since the winding down of the savings-and-loan debacle.

"The initial round of failures will come from smaller banks with limited access to capital and overexposure to commercial real estate," Cassidy said.

"Could banks with $75 billion or $100 billion of assets fail? That's hard to say, but it depends on the severity of the economic downturn and the real estate decline," he added.

Banks are under pressure as a slowing economy, the housing crunch, weak job growth and rising energy costs make it harder for individuals and businesses to pay their bills.

Compounding the problem has been the seizing up of capital markets that has led to more than $130 billion of write-downs worldwide, including at lenders such as Citigroup Inc (C.N), Bank of America Corp (BAC.N) and Washington Mutual Inc (WM.N).

On Wednesday, Standard & Poor's said financial industry losses linked to mortgages may reach more than $265 billion.

Analyst Tanya Azarchs expects the pain to spread to regional banks, and especially "some of the smaller players that have yet to feel the full extent" of the credit crunch.

Cassidy said: "The regulatory focus is now acutely on commercial real estate. The problems are centered around construction loans in residential housing. Home prices and sales are declining. This leaves builders unable to carry the debt they took on because they can't sell their homes."

RESERVES MAY GROW, MERGERS MAY NOT

There are 8,553 banking institutions insured by the Federal Deposit Insurance Corp. Of these, 7,285 are commercial banks, 1,257 are thrifts and 11 are U.S. branches of foreign banks.

Twenty-six banks have failed since the last U.S. recession began in March 2001, the FDIC said.

The latest came last week, when Douglass National Bank of Kansas City, Missouri collapsed. Liberty Bank & Trust Co of New Orleans took over its $53.8 million of deposits. FDIC-insured institutions have about $8.19 trillion of deposits overall.

Cassidy expects the bank failure rate to be the worst since at least 1993, when 50 banks collapsed. That followed more than 2,000 failures in the previous decade, according to FDIC data.

Still, that pales in comparison with the more than 9,000 bank failures from 1930-1933, during the Great Depression, Federal Reserve data show.

A top U.S. bank regulator, Comptroller of the Currency John Dugan, said on Thursday that his office was prepared to intervene if banks with large real estate exposure maintained unreasonably low reserves for bad loans.

A tough credit and regulatory environment may make it hard for struggling banks to find suitors, Cassidy said.

On Thursday, Midwest banks Integra Bank Corp IBNK.O and Peoples Community Bancorp Inc PCBI.O called off their merger.

Integra Chief Executive Mike Vea lamented that the housing crunch "fundamentally changed the attitudes of the stock market, industry experts and regulators toward mergers."

Cassidy said: "Sellers are not going to receive the premiums they think they deserve. Merger activity is going to slow until the down leg in the credit cycle is past."

(Editing by Gary Hill)

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