Potential problem loans rise at midcap banks: Morgan Stanley

(Reuters) - Potential problem loans continued to rise at eight midcap banks during the first quarter, with Colonial BancGroup Inc (CNB.N) and First Horizon National Corp (FHN.N) showing largest sequential increases, Morgan Stanley said citing data collected from regulatory filings.

Both Colonial and First Horizon experienced a sequential increase of more than 125 basis points in potential problem loans, the brokerage noted.

"We view the change in the level of potential problem loans as a leading indicator of non-performing loans and credit losses, suggesting that the fundamental environment for the group remains quite challenging," Morgan Stanley said.

The brokerage said the stocks could come under pressure if the rise in potential problem loans lead to a corresponding increase in non-performing loans and net charge-offs in the next few quarters.

These increases suggest that credit deterioration is not abating and there could be further large increases in non-performing loans and net charge-offs, the brokerage said.

Morgan Stanley defined problem loans as those performing loans for which the company management has serious doubts as to the ability of the borrower to comply with current loan repayment terms.

City National Corp (CYN.N) and Commerce Bancshares Inc (CBSH.O), however, saw the biggest declines -- 50 basis points and 22 basis points, respectively -- in their potential problem loans from fourth-quarter levels, the brokerage said.

"We suspect that some of the decline in potential problem loans might have been caused by a migration of certain loans from potentially problematic to non-performing status," Morgan Stanley said.

The other banks that saw a sequential rise in potential problem loans are: Washington Federal Inc (WFSL.O), South Financial Group Inc (TSFG.O), Associated Banc-Corp (ASBC.O), TCF Financial Corp (TCB.N), BOK Financial Corp (BOKF.O) and Westamerica Bancorp (WABC.O).

Cullen/Frost Bankers Inc (CFR.N) saw a 12 basis points decline in potential problem loans, the brokerage noted.

(Reporting by Supantha Mukherjee in Bangalore; Editing by Himani Sarkar)