Some regional banks face capital shortfalls - report

NEW YORK, July 13 (Reuters) - At least three U.S. regional banks could have capital shortfalls if they were subjected to the same stress tests as large banks were earlier this year, analysts at Moody's Analytics said in a new report.

M&T Bank Corp (MTB.N) and Synovus Financial Corp (SNV.N) could need to boost Tier 1 capital by 10 to 18 percent, while Colonial BancGroup Inc (CNB.N) would need to increase capital by more than 18 percent, according to Michael Love, financial institutions analyst in the capital markets research group at Moody's Analytics.

Spokesmen for the banks could not immediately be reached for comment.

The results are based on rough stress tests by Moody's Analytics "and should be considered indicative only," the report said. The report, co-authored by Love and Chris Lam and dated on Friday, did not look at the large super-regional banks.

Large banks raced to issue stock and sell assets earlier this year after Federal Reserve stress tests showed that 10 of the 19 largest banks needed a $75 billion capital cushion in case the economic slump was worse than expected.

The government has not announced plans to do stress tests on regional banks, so they may wait to raise capital when and if losses are realized, Moody's said.

Regional banks are already being treated in the bond market as though they were weaker than larger banks. On average, bonds of regional banks are trading as though they were rated four notches below their actual ratings, while bonds of the 19 largest banks are trading about two notches below their actual ratings.

Concerns about the regional banks center on their relatively large exposure to commercial real estate loans, Love said.

"Commercial real estate tends to be a lagging asset -- it tends to worsen even as the recession is ending, and that's really the risk that folks are worrying about," Love said in an interview.

While larger banks have successfully raised common equity at a reasonable cost, that may be more difficult for smaller banks, Love said. In addition to their commercial real estate exposure, they also lack the fixed-income trading revenues that may offset losses at some bigger banks, he said.

"If they still have TARP money, which these banks generally do, they could convert that to equity, but that might not be viewed positively in terms of the price of their bonds," Love said.

Love recommended that investors avoid bonds of Synovus and Citizens Republic Bancorp (CRBC.O). Though Citizens capital shortfall would be "low to none" under an adverse scenario, its bonds are trading more expensively relative to its ratings than other regional banks with the same capital risk level.

In addition, these banks would have difficulty raising equity capital because of their depressed stock prices, he said.

Bonds of City National Corp (CYN.N), Associated Banc-Corp (ASBC.O) and First Horizon National Corp (FHN.N), on the other hand, have sizable upside potential, the report said. Those bonds are trading six to eight steps below their actual ratings, even though they have sufficient capital, the report said.

(Reporting by Dena Aubin)