May 28 (Bloomberg) -- KeyCorp fell the most since the stock-market crash of 1987 after doubling its forecast for loans that won't be repaid, prompting concern that regional banks have underestimated the cost of bad mortgages.

KeyCorp sank 10.6 percent in New York Stock Exchange trading after saying uncollectible debts may be as much as 1.3 percent of average total loans this year. The figure may rise even more, KeyCorp said, as the Cleveland-based company cuts holdings tied to homebuilders.

The revision by the Ohio bank, which last month quadrupled its provision for loan losses to $187 million, may foretell similar increases at U.S. commercial banks as home prices keep sliding, analysts said. The S&P/Case-Shiller home-price index fell 14.4 percent in March to the lowest since figures were first published in 2001, data released yesterday show.

``Things are getting significantly worse before they are going to get better for KeyCorp and the banking industry,'' RBC Capital Markets analyst Gerard Cassidy said in a note to investors today. He rates KeyCorp ``underperform.''

Banks and securities firms have already recorded $382.8 billion in writedowns and credit losses tied to the slumping housing market. Lenders have several quarters to go before loan losses reach bottom, said Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners LP.

``Banks are a little bit delusional right now about when they're going to turn around,'' said New York-based Fitzgibbon, who has 11 ``hold'' ratings, three ``buys'' and two ``sells'' on the banks he covers, which don't include KeyCorp. ``Recessions don't turn around in days or weeks or months. It's a multiyear kind of thing.''

Banks Tumble

KeyCorp fell $2.29 to $19.66 at 4:10 p.m. in New York Stock Exchange composite trading. It was the biggest one-day drop since Oct. 19, 1987. The stock had declined 6.4 percent this year before today. KeyCorp spokesman Bill Murschel declined additional comment.

Five of the 24 companies in the KBW Bank Index dropped by more than 4 percent. Fifth Third Bancorp slid 3.6 percent, M&T Bank Corp. lost 3.5 percent and Comerica Inc. declined 3.8 percent.

KeyCorp's revision yesterday means the bank may have to halve its dividend so it isn't forced to raise more capital, Goldman Sachs Group Inc. analyst Brian Foran said in a note to investors today.

Already, banks holding repossessed properties are offering buyers discounts of as much as 40 percent, according to Moody's Economy.com analyst Celia Chen.

Foreclosures

Banks are concluding that they must unload foreclosed properties to get the properties off their books, said Jeff Davis, an analyst at FTN Midwest Securities in Nashville. Davis rates KeyCorp ``neutral.''

``We're getting to the point where reality is sinking in and the sellers are cutting prices,'' Davis said. ``The deeper we go into the year, the more foreclosed properties trading hands will impact the data.''

Housing woes are equally acute for savings and loans, which boosted loan-loss reserves by 38 percent in the first quarter to $7.6 billion, according to a report yesterday from the Office of Thrift Supervision. Troubled assets, loans 90 or more days overdue, and repossessed assets rose to 2.06 percent of all assets, from 1.66 percent in the fourth quarter, the OTS said.

Nor are investment banks immune. Goldman Sachs, Lehman Brothers Holdings Inc. and Morgan Stanley had their second- quarter profit estimates cut today by JPMorgan Chase & Co. because of asset writedowns and ineffective hedges.

Banks that had projected a recovery starting in the second half of the year may be forced instead to continue building loss reserves and raising capital, Fitzgibbon said.

Lenders, especially in the Southeast and Southwest, are going to be ``particularly susceptible to the problems in the housing market, and are likely going to have to radically reevaluate their projections in the coming weeks,'' Fitzgibbon said.

To contact the reporter on this story: Linda Shen in New York at lshen21@bloomberg.net

Last Updated: May 28, 2008 16:19 EDT