ANALYSIS-U.S. Midwest banks face the longest road to recovery

* Midwest banks to recover last
* Economic deterioration pushing back recovery
* Bleak earnings expected, NPAs, provisions on the rise

By Sweta Singh and Amiteshwar Singh
BANGALORE, April 20 (Reuters) - U.S. Midwest banks may
well be the last to recover from the current recession as the
region continues to struggle with a manufacturing slump
deepened by the virtual collapse of the auto makers.
As compared with banks on the west or east coast, Midwest
banks have far more troubling issues as the economy there is
little diversified, Bernard Baumohl, chief global economist at
the Economic Outlook Group, told Reuters.
Lenders like KeyCorp , Huntington Bancshares Inc
, Amcore Financial Inc , Peoples Community
Bancorp Inc , Corus Bankshares Inc , Citizens
Republic Bancorp Inc and Integra Bank Corp
have seen their stocks plummet over the past 12 months because
of the auto industry's problems.
The Midwest economy is heavily reliant on manufacturing
industries, led by the big three auto makers -- General Motors
Corp , Ford Motor Co and Chrysler LLC [CBS.UL].
Industry watchers say that recovery for banks in the
region will only come after the auto industry stabilizes and
breathes a sigh of relief.
The combination of a deteriorating job market, sharply
falling home prices and a grim outlook for the near term will
hurt banks' performance in the region, Baumohl said.
In March, the Midwest recorded the second-highest regional
jobless rate at 9 percent, according to data released by the
U.S. Bureau of Labor Statistics.
In early April, the Federal Reserve Bank of Chicago said
its Midwest manufacturing index dropped to its weakest in
almost 15 years in February as steel and machinery output
tumbled.
General Motors' inching toward possible bankruptcy has
deepened the woes of the economy in the region, and banks with
exposure to suppliers to the auto makers are further
threatened.
"That is making the whole business sector weaker in the
region, which means banks see fewer opportunities to make new
loans and have to be more worried about their existing loans,"
said Lawrence White, professor of economics at New York
University's Stern School of business.

BLEAK EARNINGS
Over a third of the regional banks in the Midwest are
expected to report quarterly losses and show deteriorating
credit quality.
Some markets in the region have seen an outflow of
businesses and population that has reduced the number of
growth opportunities and put pressure on profitability versus
banks in other regions, analyst Terry McEvoy of Oppenheimer &
Co said.
Financial results will be very weak in the first quarter,
reflecting the continued weakness in the Midwest economy and
the pressure that the auto sector is putting on the economy,
analysts said.
"The major concern is that the credit deterioration is
going to seep further into commercial and commercial real
estate credits and we are going to see the non-performers move
up," Lana Chan of BMO Capital Markets said.
Provisions for bad loans will potentially come in above
expectations, putting pressure on earnings and in many cases
resulting in a quarterly loss, McEvoy said.
Michigan-based Capitol Bancorp Inc posted a
wider-than-expected quarterly loss on Friday as provisions for
loan losses soared, and it reduced salaries as part of its
efforts to cut costs.
Among Midwest banks, McEvoy expects TCF Financial Corp
, Associated Banc-Corp and FirstMerit Corp
to have a profitable quarter.
Associated Banc-Corp, though profitable, reported a 47
percent fall in first-quarter earnings as provisions soared.
Despite the bleak scenario in the Midwest, White expects
banks in the region to pull through the crisis.
"I am sure we will see some failures, some FDIC
receiverships, but I think most Midwest banks will pull
through the crisis. It will not be easy, it's not going to be
comfortable," White said.
(Reporting by Sweta Singh in Bangalore; Editing by Deepak
Kannan)
((sweta.singh@thomsonreuters.com ; within U.S. +1 646 223
8780; outside U.S. +91 80 4135 5800; Reuters Messaging:
sweta.singh.reuters.com@reuters.net))
Keywords: MIDWESTBANKS/

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