January 27, 2010 / 4:21 PM / 8 years ago

UPDATE 1-South Financial slumps on Q4 loss, credit woes

* Does not see rapid return to normal credit costs

* Says exploring capital raising measures

* Sees balance sheet declining till H1, 2010

* Analysts express concern over capital levels

* Stock plummets 29 pct on heavy volumes (Adds conference call details, analyst comments; updates stock activity)

BANGALORE, Jan 27 (Reuters) - Shares of South Financial Group Inc TSFG.O slumped as much as 29 percent, a day after the troubled lender posted its eighth straight quarterly loss and warned that credit woes may not be over yet.

The company does not see a rapid return to normal credit costs, and is actively pursuing capital raising measures, Chief Executive Lynn Harton said on a conference call with analysts on Wednesday.

“We will see 2010 losses declining. However, I do believe the decline will be moderate,” Harton said.

Morgan Stanley analyst Ken Zerbe said he strongly believes the company needs to raise equity to boost its capital ratios, but it is unclear exactly how or when management plans to do this.

“Until we see signs of credit stability and management can present investors with a clear plan of how it will rebuild its capital position, we do not recommend an investment in South Financial,” Zerbe said in a note to clients.

South Financial, which received a $347 million investment from the U.S. Treasury, has taken a huge hit from its exposure to bad construction loans and is aggressively looking to curb its non-performing assets and return to profitability.

The company expects its balance sheet to continue to decline over the first half of 2010 and begin to level off thorughout the remainder of the year.

While there were some positive trends in the quarter like margin expansion and improved funding costs, capital remains the biggest concern for the company, as the tangible equity ratio remains as low as 3.7 percent, Keefe, Bruyette & Woods analyst Jefferson Harralson said in a note.

Last year, a $200 million writedown on future tax assets, called valuation adjustments, also hurt the company.

Although valuation allowance does not impact a company’s regulatory capital ratios, it does hurt tangible common equity, a measure of capital increasingly important to stock investors and debt rating agencies.

Fitch Ratings downgraded its ratings for South Financial Group and its principal banking subsidiary, Carolina First Bank.

The Greenville, South Carolina-based bank posted a net loss available to common shareholders of $193.9 million, or 90 cents a share on Tuesday, compared with $319.4 million, or $4.29 a share, a year back. [ID:nSGE60P0D8]

Shares of the company were down 20 cents at 49 cents in morning trade on Nasdaq. More than 20 million shares changed hands by 11 ET, compared with a 50-day moving average volume of just over 4 million shares. (Reporting by Anurag Kotoky in Bangalore; Editing by Maju Samuel)

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