July 20 (Bloomberg) -- Regions Financial Corp., Zions Bancorporation and KeyCorp may tell investors this week how hard they’ll be hit by the doubling of commercial property defaults after tying up 25 percent of their loans in the business.

Analysts expect the three regional banks to report more than $400 million in combined second-quarter losses as more borrowers fell behind on loan payments. Zions, the biggest bank based in Utah, releases results after U.S. markets close today. Regions, the largest in Alabama, reports before trading tomorrow and KeyCorp, ranked second in Ohio, follows on July 22.

With more than $108 billion of U.S. commercial properties in distress, according to Real Capital Analytics Inc., banks are being forced to extend and modify loans to avoid taking losses. There were 5,315 buildings in default, foreclosure or bankruptcy at the end of June, more than twice the number at the close of 2008, according to New York-based Real Capital.

“We’re probably past the worst of the residential real estate deterioration, but you’ll see more pressure potentially on commercial real estate and construction,” said Jennifer Thompson, an analyst at Portales Partners LLC in New York who covers banks. “Credit quality is going to get worse.”

Regions, based in Birmingham, Alabama, held $36.8 billion in commercial real estate and construction loans at the end of the first quarter, representing 38 percent of its overall loans. KeyCorp in Cleveland had $18.3 billion, or 25 percent of its portfolio, and Salt Lake City-based Zions held $14.5 billion, or 35 percent.

Wells Fargo

Wells Fargo & Co., the biggest home lender in the first quarter, reports results on July 22, and the average analysts estimate is for a profit of $1.8 billion. The San Francisco- based company’s commercial mortgages and construction loans account for 16 percent of its lending portfolio.

KeyCorp’s loss may equal $176.7 million on an adjusted basis, while Regions may say it lost $133.7 million and Zions $95.8 million, according to analysts surveyed by Bloomberg.

Commercial real estate prices in the U.S. have tumbled more than 30 percent from their peak in 2007 and are likely to end up 40 percent to 50 percent below their highs before starting to rebound, according to Real Capital Chief Executive Officer Robert White. Of the $108 billion of distressed commercial properties, $4.1 billion have been worked out by lenders, White’s firm said in a July 8 report.

The dearth of workouts shows that banks are trying to delay losses by extending terms of loans so they can avoid foreclosing on properties, said Steve Bram, co-founder of George Smith Partners Inc., a real estate investment banking firm in Los Angeles.

Reality Check

“If lenders actually took them into account and marked their books down to what the loans are worth now, most banks would be upside down,” said Bram, in a speech at a conference last week in Cerritos, California. Bram estimates there are $168 billion in commercial loans due this year to banks and thrifts and “almost all of these loans are not worth their face value.”

Regions spokesman Tim Deighton said the company has taken “aggressive steps to de-risk” the commercial real estate portfolio over the past two years. KeyCorp has been “very aggressive” in working out its portfolio over the past five quarters, said spokesman William Murschel.

Zions spokesman James Abbott said his bank has been “reappraising properties frequently” and taken “haircuts” of more than 10 percent after the appraisals.

Treasury Plan

In an effort to remove as much as $40 billion in troubled assets from financial institutions, the U.S. Treasury this month named BlackRock Inc., Invesco Ltd. and seven other managers for the Public-Private Investment Program. The government will invest as much as $30 billion and the nine participants may raise a total of $10 billion, the Treasury said.

Financial firms worldwide have reported more than $1.5 trillion in losses and writedowns stemming from the housing collapse, with U.S. companies accounting for two-thirds of the deficit. With unemployment at a 26-year high, hotels and retailers closing their doors and California paying some contractors with IOUs, commercial defaults will accelerate, said Douglas Ciocca, who helps oversee $1.8 billion at Renaissance Financial Corp. in Leewood, Kansas. Ciocca said he’s staying away from investing in banks in part because of expected losses in commercial real estate.

“That is the lurking devil at this point,” said Ciocca, in an interview. “The profit model right now is still impaired.”

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

Last Updated: July 20, 2009 11:43 EDT