By ERIC DASH
June 19, 2008
SourceIn Ohio, the Panic of 1907 drove the Fifth National Bank into the arms of the Third National Bank, creating the singularly named Fifth Third Bank of Cincinnati.
But today Fifth Third and other regional banks across the nation are being shaken to the core by a 21st century financial crisis. For many of them, things are going from bad to worse.
Home mortgages and other loans that the banks made in good times are souring so fast that many of the lenders are scrambling to prop themselves up. If the pain worsens — and many analysts say it will — some of these banks, like Fifth Third’s predecessors, may eventually seek out suitors, most likely large national rivals.
For now, however, no one seems to want the regional banks. Stock market investors are deserting them en masse. On Wednesday, Fifth Third’s share price plunged 27 percent to $9.26, its lowest level in more than a decade, after the bank said it would cut its dividend and seek to raise $2 billion. Other financial stocks, particularly regional banks’ shares, also tumbled. The Standard & Poor’s 500 Regional Banks Index sank 6.8 percent.
“Everybody is trying to figure out where the bottom is,” said Jennifer Thompson, a regional bank analyst for Portales Partners in New York. “Every time a bank reports another capital raise or reports that things are worse than they anticipated, there is another round of selling.”
But Wednesday was just one more bad day in what has been a horrible year for small and midsize banks. Their descent in the stock market has been remorseless, reflecting the economic pain in their own backyards. Weakening housing and construction markets in regions like the Midwest, Southeast and Southwest have hit lenders in those areas hard.
For the banks’ shareholders, the numbers tell a sad story: Wednesday’s decline brought the loss for the S.& P. bank index to 39.3 percent so far this year. Fifth Third’s odd name almost seems like a bad joke. Fifth Third has lost two-thirds of its value this year. Shares of two other banks based in Ohio, the National City Corporation, of Cleveland, and Huntington Bancshares, of Columbus, have suffered similar declines.
Banks based in the Southeast are hurting, too. The Regions Financial Corporation, the biggest bank in Alabama, has lost half its value. Standard & Poor’s predicted this week that Regions would cut its dividend to conserve its capital in the face of rising losses on real estate loans. The share price of SunTrust Banks, which operates across the Southeast, has fallen almost 41 percent.
Small and midsize lenders are in far less danger than they were during the 1980s and early 1990s, when about 1,600 federally insured institutions failed during a savings and loan crisis. But the breadth and depth of the current troubles have caught bank executives by surprise. Federal regulators are particularly concerned about the exposure of smaller banks to the commercial real estate market, which has softened in some parts of the country.
But another worry is that raising money will become increasingly costly for banks that need capital. In a report issued this week, analysts at Goldman Sachs said banks might need as much as $65 billion on top of the $120 billion they have already raised.
But so far the vast majority of investors who bought into financial companies in the hope that the industry was out of the woods have lost, and lost big. As a result, many investors are reluctant to sink more money into regional banks, fearing their investments will be diluted if the banks sell even more stock. While many regional banks are trading far below their book values — at $4.83 on Wednesday, National City fetched just a fifth of its book value per share — many people are simply afraid to buy.
“You are in this death spiral of dilution,” said David Ellison, the chief investment officer of FBR Funds, a mutual fund company based in Arlington, Va. “It’s this toxic math.”
The need for new financing highlights the trouble many banks are having in selling assets like mortgages and home equity loans. They are trying to offload these assets to reduce amount of capital they are required to hold.
But more than anything, the problems confronting regional banks underscore the extent to which the housing crisis has spread throughout the country. In the Southeast, Regions and SunTrust are reeling from loosely underwritten mortgages now that real estate values are plummeting in the region.
In the West, Washington Mutual, the nation’s largest savings and loan, is being hurt by loans that it made to borrowers with shaky credit. Fremont General, the parent of a big subprime lender and a bank in California, filed for bankruptcy protection on Wednesday. Customers’ accounts, insured by the Federal Deposit Insurance Corporation, are safe.
A handful of tiny banks have failed in small towns in Arkansas, Minnesota and Missouri. Rust Belt banks like National City and Fifth Third, in the meantime, have been stung by losses not only on their home turf but also in Florida, where they expanded in recent years. Initially, the push into Florida helped the banks increase growth rates as their hometown economies worsened. Now, these lenders are challenged on two fronts.
Bankers, who tried to assign innings to the credit crisis only a few months ago, are now resigned to participating in an extra-inning game. Several analysts now think that industry losses will not peak until next year.
“We have gone from shock and awe to blocking and tackling,” Mr. Ellison said.