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Credit problems only beginning for regional banks
NEW YORK (AP) - The credit crisis has taken a toll on national and investment banks, but is only now starting to rock smaller, regional banks.

It is a problem that is likely to stick around for the foreseeable future, leading banks to raise loss reserves and look for new capital.

Keefe, Bruyette & Woods Inc. analyst Fred Cannon said regional banks' problems have been apparent recently as they have increased loss provisions to cover faltering loans. But, those reserves are still short of the amount needed, he said.

Bank reserves are below historical levels seen entering previous economic downturns, Cannon said. Going into the 2001 recession, reserves were about 1.85 percent of total loans. Reserves are at about 1.35 percent of total loans today.

Almost universally, regional banks have been disclosing increases in loss provisions and charge-offs -- loans written off as not being repaid -- as they announce first-quarter financial results.

Sovereign Bancorp Inc. said Wednesday it set aside $135 million to cover bad loans during the first quarter, nearly triple the reserve taken during the year-ago period.

Last week, U.S. Bancorp increased its loan-loss provision to $485 million, a $260 million increase over the fourth quarter of 2007, as its earnings fell 4 percent. Net charge-offs reached $293 million during the quarter, 30 percent more than the previous quarter and 66 percent more than the year-ago period.

The mounting worries have sent shares of regional banks falling throughout the year as well. The KBW Regional Banking Index has fallen 10 percent since the beginning of 2008.

Credit market turmoil first hit investment banks in 2007, which have to account for potential losses by taking write-downs and marking investments to their current trading value. Those problems led to a crisis of liquidity, said James Abbott, an analyst with Friedman, Billings, Ramsey & Co.

The liquidity crisis has stabilized somewhat, Abbott said, making way for the second phase of the credit turmoil -- actual losses in lending portfolios.

Since regional banks typically hold loans they originate in a portfolio, they only account for losses by building up reserves to cover charge-offs.

Residential mortgages were the first to falter, but those problems have spread to other types of loans, including construction and home equity loans.

Abbott expects an uptick in commercial loan defaults as well because as consumers cut down on spending, it will make it tougher for businesses to repay loans.

Because of the need for more reserves, banks will also need to find new sources of cash.

More than 20 regional banks could be in need of new capital, according to a report recently released by Keefe, Bruyette & Woods.

"A lot of companies should be out there raising capital," FBR's Abbott said. If banks do not adequately raise new funds they will likely emerge from the credit tumult in a "significantly weakened" position, he said.

In its report, KBW estimated 23 regional banks might have to raise as much as $10 billion to maintain operations.

Consumers may be skittish in this weak economy but they haven't completely closed their wallets. Here's which companies will benefit.


NEW YORK (CNNMoney.com) -- It's no secret that the economy is in a slump, and that Americans are keeping a closer eye on how much they spend.

But while shoppers may be more cautious, they are still hitting the malls and going online for bargains.

Apple (AAPL, Fortune 500), for example, will report its first-quarter results Wednesday and analysts expect sales to rise 32%. Amazon.com (AMZN, Fortune 500) is also reporting its latest results Wednesday and Wall Street is projecting a 36% increase in revenue.

TalkBack: Are you cutting back on spending compared to a year ago?
With this in mind, I decided to search for some investment opportunities in two key sectors: consumer discretionary (retailers, clothing, autos, media companies and restaurants) and consumer staples (food, beverages, household products).

I looked for decently sized companies (market value of at least $1 billion) that are expected to report sales and profit growth of at least 10% this fiscal year, more than respectable increases for consumer companies in an economic environment that some are already calling a recession.

What's more, as an added safeguard, I made sure that none of the companies has had its profit targets for the year cut by analysts in the past three months. I didn't want companies that are expected to report earnings growth of 10% now but were expected only a few months earlier to grow by 20%

Finally, I made sure that the companies are all reasonably priced. So I weeded out any companies trading at more than 20 times fiscal 2008 earnings estimates.

Holding up - and then some
That left me with an interesting list of stocks. And surprisingly, more discretionary companies that popped up than I had anticipated. You'd think that retailers, restaurants and car manufacturers would feel a bigger pinch than say, food makers, in these tough times.

But several well-known discretionary companies popped up, including Japanese auto makers Toyota (TM) and Honda (HMC), luxury bag retailer Coach (COH), watch maker Fossil (FOSL) and apparel retailers Polo Ralph Lauren (RL) and Aeropostale (ARO).

A couple of members of the newly minted Fortune 500 list also made it through my screening process, including sneaker giant Nike (NKE, Fortune 500), satellite TV leader DirecTV (DTV, Fortune 500) and casual dining chain owner Darden Restaurants (DRI, Fortune 500) (it owns Red Lobster and Olive Garden).

On the more stodgy staples side, Fortune 500 food producers ConAgra Foods (CAG, Fortune 500) and H.J. Heinz (HNZ, Fortune 500) made the cut, as did a couple of international tobacco producers including British American Tobacco (BAT) and Imperial Tobacco Group (ITY).

What this proves is that if you are an investor, it pays to do your homework. It would be all too tempting to dismiss any consumer-related company at a time when it seems that everyone is predicting doom and gloom for the economy.

But there are companies out there that are still holding up well thank you very much. And it's investing 101 that periods of immense fear and panic are often the best times to make long-term bets on high-quality companies.

So go ahead and shop until you drop for consumer stocks. There are some good sales right now if you take the time to find them.

Issue #1 - America's Money: All this week at noon ET, CNN explains how the weakening economy affects you. Full coverage.

How is the economy affecting your everyday life? Tell us about how your money situation has changed - or stayed the same - in the last few months. What's your biggest economic worry? Send us your photos and videos, or email us and share your story.