Market Spotlight: Regional Banks

"Credit and capital are all that matters," said Jefferson Harralson, a managing director and bank analyst at Keefe, Bruyette & Woods Inc. "Banks deemed to have enough capital are doing OK."

On the other hand, if investors believe a bank might need to raise capital to shore up its balance sheet amid continued deterioration in credit quality, its shares are getting hammered.

Since the middle of 2007, banks have been faced with having to set aside more cash to cover a spike in defaults, especially among loans tied to residential real estate as the housing market has tumbled. Adding to loan-loss reserves has forced some banks to raise billions of dollars and cut dividends to shore up balance sheets.

SunTrust Banks Inc. is an example. The Atlanta-based bank affirmed as recently as June 20 it does not foresee having to cut its dividend or raise cash through the sale of new stock to help shore up its capital base. Yet, during the second quarter, shares of SunTrust lost 34 percent of their value.

On Monday, KBW said it expects SunTrust will need to raise $1.5 billion in new capital in the coming years to cover mounting losses from the weakening mortgage and lending markets. In analyzing more than 140 banks, KBW said retail banks likely will need to raise an additional $30 billion in capital in the coming years to cover mounting loan losses.

East West Bancorp Inc. is one bank analysts do not think will need more capital, but still its shares plunged in the second quarter because of perception by some investors it might need more cash. East West was among 20 banks KBW highlighted in its research released Tuesday as being unlikely to need to raise capital in the coming years.

Friedman, Billings, Ramsey & Co. analyst James Abbott said that even though East West will likely face a rise in credit costs like nearly all other banks, it does not run the risk of needing more capital.

East West Bancorp has been "proactively going through its portfolio, including its commercial business" to try and improve credit quality, Abbott said. Commercial loans are likely the next type of loan to start defaulting at increasing rates as the economy weakens and consumers reign in their spending, Abbott added.

East West Bancorp has rallied some in the opening days of the third quarter, with shares rising more than 4 percent Wednesday on the heels of a nearly 8-percent gain Tuesday.