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

By Sweta Singh and Amiteshwar Singh - Analysis

BANGALORE (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 (KEY.N), Huntington Bancshares Inc (HBAN.O), Amcore Financial Inc (AMFI.O), Peoples Community Bancorp Inc PCBI.O, Corus Bankshares Inc CORS.O, Citizens Republic Bancorp Inc (CRBC.O) and Integra Bank Corp (IBNK.O) 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 (GM.N), Ford Motor Co (F.N) 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.