UPDATE 1-Avoid banks with exposure in problem states: analyst
(Adds J.P.Morgan comments)
Dec 8 (Reuters) - An analyst at Morgan Stanley recommended avoiding banks with significant exposure to states with the highest level of seriously delinquent loans, including Florida, Nevada, and California.
Colonial BancGroup Inc CNB.N is at the most risk among U.S. mid-cap banks from its exposure to states with high levels of delinquent loans, analyst Ken Zerbe said in a note to clients.
With high exposure in troubled Michigan and Ohio, Comerica Inc (CMA.N) and Huntington Bancshares Inc (HBAN.O) are also likely to suffer from higher delinquency levels, Zerbe said in a note to clients.
J.P.Morgan Securities analyst Steven Alexopoulos also expressed concerns for U.S. mid-cap banks on lower loan demand and weak equity markets.
"Overall, the tones from banks were generally negative, particularly with regards to loan demand and credit trends," Alexopoulos said with regard to a recent conference.
Residential construction is still worsening and continued pressure on commercial and industrial loans is likely to result in mounting losses for the U.S. mid-cap banks over the next several quarters, he noted.
Morgan Stanley's Zerbe said he favors banks like Hudson City Bancorp Inc (HCBK.O), People's United Financial Inc (PBCT.O) and SVB Financial Group (SIVB.O) with high-quality loan portfolios, strong capital positions, and solid loan growth.
Zerbe rates all the three stocks "overweight."
"Conversely, we are more cautious on the outlook for banks with significant exposure to the more problematic geographies and loan types -- commercial, residential construction, and home equity," Zerbe said.
The analyst's highest conviction underweight-rated stocks are Comerica, Synovus Financial Corp (SNV.N), Associated Banc-Corp (ASBC.O), and TCF Financial Corp (TCB.N).
Zerbe also identified Bank of Hawaii Corp (BOH.N) and Washington Federal Inc (WFSL.O) as having the least exposure to delinquent loans by footprint.
"Seriously delinquent" loans have risen to 5.2 percent, according to The Mortgage Bankers Association's third-quarter National Delinquency Survey, Zerbe said.
J.P.Morgan's Alexopoulos said while the purpose of U.S. Treasury's preferred capital injections under Troubled Assets Relief Program (TARP) was to fund loan growth, the bank managements noted in the conference that TARP capital will likely be used to strengthen the balance sheet in light of mounting economic uncertainty.
"However, in the spirit of the TARP program, managements aim to ultimately use the capital to fund loan growth as well as pursue acquisitions -- mostly Federal Deposit Insurance Corporation assisted near-term," he said. (Reporting by Anurag Kotoky in Bangalore; Editing by Jarshad Kakkrakandy)
