Commercial Loan Losses To Be Worse Than Feared -FBR Analysts

Banks' losses on loans to businesses will get much worse than investors expect within the next six months, according to an analyst report Monday that said it's still too early to buy bank stocks.

Losses on business loans should grow much larger during the next six months than they were during the previous two recessions and could peak in a "kitchen sink" of bad news during the fourth quarter, a team of Friedman, Billings, Ramsey & Co. analysts led by James Abbott wrote in a research note.

"We believe we are only in the very early stages of the business losses," the FBR analysts wrote.

Analysts who are bearish on the banking sector have been warning for some time that a wave of losses in business loans would follow the increasing deterioration in residential mortgages and consumer loans.

Abbott's team has been watching for cracks to appear in business loans since just after the financial crisis began in the fall of 2007. In June of last year, they issued a report saying there was a "false sense of security" around business loans, and predicting that business loan losses would emerge as a second act to the credit crisis before losses in consumer loans had peaked.

There are signs that Abbott's predictions are beginning to come true. The delinquency rate for commercial and industrial loans rose to 1.69% during the fourth quarter compared with 0.65% a year earlier, according to data from the Federal Deposit Insurance Corp. The delinquency rate for real estate loans, which began to deteriorate earlier than commercial and industrial loans, also continued to worsen, increasing to 3.8% during the fourth quarter from 1.73% a year earlier.

The FBR analysts said the increasing losses in business loans would hurt banks' profits and would likely weigh on their stock prices. Bank stocks on the KBW Bank Index have risen nearly 50% since the stock market rally began in the second week of March.

The FBR analysts said that based on macroeconomic factors alone, the banks that faced an elevated risk for future business loan problems include: Comerica Inc. (CMA), City National Corp. (CYN), PNC Financial Services Group Inc. (PNC), SunTrust Banks Inc. (STI) and Webster Financial Corp. (WBS). They also said that U.S. Bancorp (USB) and M&T Bank Corp. (MTB) had an above-average risk concerning potential business-loan losses when considering their relatively high stock prices.

-By Ed Welsch, Dow Jones Newswires; 201-938-5244; [e-mail]