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UBS Analyst Downgrades Regional Banks, Issuing Rare Sell Ratings

UBS analyst Heather Wolf downgraded the stocks of five regional banks Tuesday, assigning a sell rating to four of them on which she had been neutral: Regions Financial (RF), KeyCorp (KEY), TCF Financial Corp. (TCB) and Huntington Bancshares (HBAN). She lowered Commerce Bancshares (CBSH) to neutral from buy.

Wolf's move is unusual in part because investment bank analysts are reluctant to recommend selling stocks. UBS has sell ratings on a mere 11 percent of the companies that its analysts cover.

The reticence reflects a fear of upsetting corporate managements - those of the companies they cover, with whom cordial working relationships make workdays pass more pleasantly, and the ones who pay the analysts' salaries out of income derived, albeit indirectly, from commercial relationships with those same companies or others like them.

What is also remarkable about Wolf's downgrades is that they appear proactive. Analysts often seem like the last people on earth to realize that a company is on the ropes, advising shareholders to sell only after the stock has already collapsed.

Shares of regional banks have done well enough in the last year, performing in line with the broad market, or close to it. Wolf, in her report announcing the downgrades, said that she is encouraging investors to bail out now, ahead of a rush that she anticipates:

"We continue to believe the pace of earnings recovery will fall well short of expectations. We think the recent rally and ensuing valuations are unsustainable, and the group is poised for a meaningful pullback. That said, we believe it will take another two to three quarters before investors begin to appreciate the sluggish recovery, and the group may not begin its retrenchment until [the second half of 2010]."
Whether or not Wolf is proven right about the banks' earnings and stocks, she deserves kudos for advising investors to take profits while there are still plenty to be taken and for recognizing that a graceful exit is better than a hurried one.

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