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US Equity Research February 12, 2009
US Banks Underweight
Analyst(s): Andrew Marquardt Andrew.Marquardt@fpk.com 212-857-6137
Thoughts on Midwest Banks Post 4Q, Stock Moves, and FSP
• Midwest Regional banks posted disappointing 4Q results, as 8 of 9 banks reported “core” EPS
below our tempered expectations (ASBC was in line) and all 9 missed vs consensus. The primary
driver for misses was higher than expected credit costs. See Fig 1 for summary.
• Estimate revisions were all down due to higher credit costs, lower fees, and higher core expense
run rates likely to continue into this year and next. With this note we are lowering our estimates for
CMA, FITB, and KEY following earnings. See Fig 2 for details.
• Key issues remain capital, loss content on balance sheets, and core earnings power. We
update our estimated loss content figures for 4Q actions—on average our Midwest banks have
realized 25% of est’d loss content on balance sheets (vs 13% as of 3Q) and est’d remaining losses
represent 35% of tangible common equity and 21% of Tier 1 capital. See Fig 4.
• Auto sector woes will hurt Midwest banks more than others, given regional economies heavily
dependent on auto and manufacturing as well as banks’ exposure to the auto sector—roughly 8% of
total loans (vs low to mid-single digit average nationally). See Fig 9.
• Financial Stability Plan (FSP) a positive in theory, but implementation still unclear, as one of
the key points to the plan is to potentially purchase problem assets, but the pricing and implications
still needs to be worked out. The “contingent equity” option is likely a non-started for many as banks
will ultimately still have to face the challenge of raising dilutive capital privately if fail “stress test”.
• We feel incrementally worse about HBAN and CMA following this quick update of estimated
remaining loss content and stressed capital levels (more for HBAN than CMA).
• Feel incrementally better about CBSH, FMER, and TCB and may indeed be the best defensive
plays among the group, given capital levels and estimated remaining loss content on balance sheet.
• Our top pick among Midwest regionals remains KEY, based on a combination of capital, remaining
loss content on balance sheet, degree of confidence and credibility in mgmt, and valuation.
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