Analyst Bove cuts Fifth Third, SunTrust to sell

(Reuters) - Many U.S. regional banks, including Fifth Third Bancorp (FITB.O) and SunTrust Banks Inc (STI.N), may not show a profit until 2011, veteran banking analyst Richard Bove said, and downgraded both the stocks to "sell" from "neutral."

"I think that 2010 is going to be a tough year for the (banking) industry and that these stocks do not have built in to their prices this potential or the likelihood that Congress will pass punitive legislation," the Rochdale Securities' analyst wrote in a note to clients.

U.S. Bancorp (USB.N) appears to be particularly vulnerable if U.S. lawmakers pass a financial reform package that will definitely harm the industry's profits, Bove said and downgraded the Minneapolis-based bank to "neutral" from "buy."

Congress is wrestling with regulatory reforms aimed at avoiding a repeat of the crisis that helped push the U.S. economy into its deepest recession since the 1930s.

U.S. President Barack Obama has pushed lawmakers to wrap up their efforts by year-end, but the process is likely to drag into next year as Congress wrangles over details. Analyst Bove has repeatedly emphasized that government moves to raise capital requirements for banks and restrict use of derivatives, among others, are aimed at reducing the profit making capability of banks.

As a result, investors may now adopt a "show me" attitude, and banks would need to give some indication that they can be profitable, and be profitable in a reasonable period of time, Bove said.

"I am no longer willing to buy bank stocks because their outlook two years from now is better. There must be some other driver. There is not in Fifth Third," Bove said.

Fifth Third's continued losses will prevent the leveraging of its balance sheet and may, at some point, force an equity offering, the analyst said.

In addition, Fifth Third's low liquidity level will prevent the shifting of cash and securities into loans, and instead, the bank's credit losses are likely to remain very high, he added.

For SunTrust too, loan losses from its Florida and housing markets may keep the Southeastern regional bank in a loss position until the start of 2011 despite management's efforts to address problem areas, Bove said.

Last week, SunTrust posted its fourth straight quarterly loss, hurt by hefty loan loss provisions and an accounting change.

SunTrust is still suffering relatively high losses from home construction and mortgage-related lending, while its rivals have reported an easing of such problems. Analyst Bove also revised his price targets and outlook for Fifth Third, U.S. Bancorp and SunTrust.

Shares of Fifth Third, U.S. Bancorp and SunTrust closed Friday at $10.34, $24.95, and $20.99, respectively.

(Reporting by Tenzin Pema in Bangalore; Editing by Maju Samuel and Aradhana Aravindan)