Regional Banks Facing Bigger Credit Headwinds, UBS Says

Wells Fargo & Co. (WFC), PNC Financial Services Group Inc. (PNC) and several other large regional banks face bigger credit strains than their stock prices would suggest, UBS AG (UBS) said Thursday as it started coverage of ten large regional banks with "sell" or "neutral" ratings.

The note of caution on Wells Fargo from ex-Merrill Lynch analyst Heather Wolf, known for predicting trouble at Huntington Bancshares Inc. (HBAN), Zions Bancorp (ZION) and elsewhere in 2007-08, contrasts with some of the Street's more recent favorable commentary.

Monday, Goldman Sachs (GS) singled out Wells Fargo and Capital One Financial Corp. (COF) for upgrades as it raised its rating on the large-bank sector to attractive.

That upgrade, which came with caveats for most of the regional-banking sector, followed other Wells Fargo upgrades by Bernstein Research, Miller Tabak & Co. and NAB Research since August.

Both Wells Fargo and PNC face "meaningful" credit problems in the near term that make them likely to disappoint the Street's 2010 and 2011 earnings forecasts, UBS said.

UBS set a $20 price target for Wells Fargo and put PNC at $37, or about 30% and 20%, respectively, below recent prices of each.

Wells Fargo shares closed up 2.1% Wednesday at $29.26, and PNC closed at $45.73.

UBS also set its 2010 earnings estimates for both banks well under the Street consensus.

Not all regional banks' balance sheets are as challenged, UBS said, citing BB&T Corp. (BBT), M&T Bank Corp. (MTB) and U.S. Bancorp (USB) among those with stronger outlooks. But the stocks of those banks already reflect the strength, UBS said as it issued a "sell" rating for BB&T and "neutral" ratings for the others.

UBS also set "sell" ratings for Comerica Inc. (CMA), SunTrust Banks Inc. (STI) and Fifth Third Bancorp (FITB).

It set Regions Financial Corp. (RF) and KeyCorp (KEY) at "neutral."

Shares in Wells Fargo slipped 0.1% to $29.23 in premarket trading, while PNC was off about 0.5% to $45.38.

Officials at Wells Fargo and PNC could not immediately be reached.

-By Brendan Conway, Dow Jones Newswires; [phone]; [e-mail]