Mid-Atlantic banks face more loan losses-report

NEW YORK (Reuters) - Big Mid-Atlantic banks face more losses from the real estate slump, according to a report on Monday from a regional Federal Reserve that suggests the worst has not passed for the beleaguered banking sector.

Prospects of an ever-growing stockpile of bad loans on homes, office buildings and shopping malls will likely force banks to seek additional capital and/or to put aside more money to cover further losses, the Philadelphia Federal Reserve said.

While the latest study focused on banks the regional Fed oversees in three Mid-Atlantic states -- Pennsylvania, New Jersey and Delaware, many of them do business across the country.

Financial conditions at these large Mid-Atlantic banks worsened across the board in the last quarter of 2007, deteriorating to their weakest levels in 15 years by some measures, the Philadelphia Fed said.

"Large banks may need to increase their provisioning for loan losses in future quarters, reducing income," it said in its quarterly "Banking Brief."

Most notably, the return on assets at large Mid-Atlantic banks fell to 0.83 percent in the fourth quarter from 1.09 percent in the third quarter, the report said.

This measure of bank performance deteriorated even more on a national level, underscoring the stress of the housing slump and global credit crunch on the entire U.S. banking system.

The return on assets among all large U.S. banks fell to 0.82 percent in the fourth quarter from 1.06 percent in the third quarter, according to the Philadelphia Fed.

While defaults and delinquencies on residential mortgages continued to hurt Mid-Atlantic bank results, rising charge-offs on commercial real estate loans and "substantial" trading losses also took their toll in the final months of 2007, the regional Fed said.

Despite worsening results, all Mid-Atlantic banks -- both large and community banks -- still have solid capital cushions to offset rising loan losses, the report said.

But their safety nets are dwindling as bad loans have been rising more quickly than loss reserves, it said.

(Reporting by Richard Leong; Editing by Dan Grebler)