Regional banks face bankruptcy risk

NEW YORK (Reuters) - Regional banks exposed to deteriorating home equity loans are facing a greater risk of bankruptcy, possibly extending a U.S. credit crisis to 2010, a senior Morgan Stanley credit analyst said on Monday.

Wall Street bank exposure to subprime mortgage debt and structured finance products already has resulted in more than $400 billion of write-downs and losses since last year. Now other consumer debt, such as credit cards and auto loans, may be the next source of busted loans.

Regional banks with exposure to U.S homeowners defaulting on their home equity loans are particularly vulnerable, said Greg Peters, head of global credit strategy at Morgan Stanley in New York, speaking at the Reuters Investment Outlook Summit.

"The subprime error will go down as one of the biggest mistakes ever," Peters said. "What we haven't even seen yet is the regional bank problem coming home to roost."

Regional bank KeyCorp (KEY.N) last month rattled financial markets when it forecast a surge in bad loans. The Cleveland-based bank, with nearly 1,000 branches in 14 states, predicted that loan charge-offs this year will climb as high as 1.3 percent of its loan portfolio.

Previously, KeyCorp had said the charge-off rate would range from 0.65 percent to 0.9 percent.

Delinquencies on home equity credit lines have at least doubled in the year through April, according to Credit Suisse. For loans made in 2006, when house prices began falling, delinquencies have climbed above 9 percent from about 3 percent a year earlier.

The president of ratings agency Standard & Poor's, Deven Sharma, also told the Reuters Summit that regional banks face a challenging environment because "a lot of them have construction loans and consumer debt on their books."

He noted that the Federal Deposit Insurance Company, which regulates and guarantees customers' savings in these small banks, has grown increasingly worried about small banks' high exposure to commercial real estate among other issues.

So far in the second quarter, the KBW Regional Bank Index .KRX -- which includes KeyCorp -- is down more than 11 percent. This compares with a 4 percent rise in the Standard & Poor's 500 .SPX.

"We are in the second phase (of the credit crisis) and I think it's going be a lot longer than what most are expecting," Peters said.

Securitization, or the repackaging of bonds and other assets, was the main driver of the credit boom years. The securitization market now is basically "dead," Peters said, forcing Wall Street banks to raise capital to bolster their balance sheets.

Lehman Brothers Holdings Inc LEH.N on Monday sold $6 billion of stock and convertible securities to bolster its capital base as the company prepares to post a $2.77 billion quarterly loss after trading and hedging losses.

Lehman, the fourth-largest U.S. investment bank, said it offered common stock and convertible preferred stock. The public offerings will dilute existing shareholders; Lehman's shares ended down nearly 9 percent at $29.48, while its bonds gained as the plan focused on equity and not debt. For details, see <ID:nN09455556>

Still, some analysts say some banks may offer value. Wells Fargo (WFC.N), U.S. Bancorp (USB.N), BB&T Corp (BBT.N) and PNC Financial (PNC.N) are best positioned to do well, said Ladenburg Thalmann Co's Richard Bove.

Those banks have done a better job of navigating the challenging environment than some of their rivals, Bove said, referring to the strength of commercial banks, and not investment banks.

"There is plenty of liquidity in the banking system and bank earnings are going to double over the next couple of years," Bove said.

(For summit blog: summitnotebook.reuters.com/)

(Additional reporting by Al Yoon, editing by Leslie Adler)