Jan. 16 (Bloomberg) -- Regions Financial Corp., Capital One Financial Corp. and PNC Financial Services Group Inc. may say bad loans spread to auto, consumer and commercial finance from mortgages, resulting in a record earnings decline for regional U.S. banks.

Fourth-quarter earnings per share at the seven biggest regional banks probably dropped an unprecedented 66 percent, according to Sandler O'Neill & Partners research director Mark Fitzgibbon. It may be ``the mother of all kitchen-sink quarters'' as banks pile on as many write-offs as possible to ensure that few or none occur this year, he said.

Regions Financial, Alabama's biggest bank, told shareholders Jan. 3 that $900 million of loans to homebuilders may not be fully repaid. Capital One, based in McLean, Virginia, has said profit will be 44 percent below analysts' estimates as auto and credit-card debt collections slowed. Pittsburgh-based PNC expects to reduce the value of $1.5 billion of commercial mortgages held for sale, while Wachovia Corp., SunTrust Inc. and U.S. Bancorp spent more than $2.5 billion combined to bail out money-market funds.

``We're in the early stages of this credit cycle and we're trying to get our arms around how severe it is,'' said Robert W. Baird & Co. analyst David George in an interview. ``We're looking at how credit quality is outside of real estate.''

Half of the 30 biggest U.S. banks have lowered their fourth-quarter forecasts because of greater credit costs, George said. None of the 10 largest regional banks will report higher profits, according to Bloomberg's survey of analysts.

Earnings Reports

San Francisco-based Wells Fargo & Co., the fifth-largest U.S. bank, said today that fourth-quarter earnings declined 38 percent as borrowers fell behind on home and consumer loans. Wachovia, ranked fourth and based in Charlotte, North Carolina, will give results Jan. 22, along with Regions, ranked 10th and based in Birmingham, Alabama. Capital One follows on Jan. 23.

The KBW Bank Index of 24 large U.S. banks and thrifts declined 25 percent in 2007, led by Washington Mutual Inc., the biggest U.S. thrift, which lost 70 percent. PNC's 11 percent decline was the best return among the largest regional banks.

Wachovia had the fewest markdowns and provisions -- $3.1 billion -- among the nation's five largest banks, CreditSights Inc. analyst David Hendler wrote in a Jan. 8 report.

Loan Losses

Sovereign Bancorp Inc., the nation's second-biggest publicly traded savings and loan by assets behind Washington Mutual, pulled out of automobile lending in the U.S. Southeast and Southwest, citing an analysis that included ``potential credit losses.''

Huntington Bancshares Inc., the Ohio-based bank that lost a third of its value last year, said last week that it had a fourth-quarter loss of $239 million caused by soured commercial real estate and home loans. Commercial markets were weak in Michigan and northern Ohio, states that have been hit hard by the decline of the U.S. auto industry.

Merrill Lynch & Co. analyst Ed Najarian predicts earnings per share of 12 U.S. banks he covers to decline by a median of 45 percent in the fourth quarter from the previous quarter, with National City Corp., the eighth-biggest U.S. bank, and KeyCorp, ranked 14th, likely to post losses.

Profits should rebound by 12 percent in 2008, Najarian said in a Jan. 8 report. While most of the banks are trading near their five-year lows, he rates seven at ``sell.'' The only ``buy'' recommendation on his list is PNC, Pennsylvania's largest bank, which owns a third of asset manager BlackRock Inc.

Merger Prospects

``The market needs to see more realistic 2008 earnings per share estimates and at least some leading indicators of more stable credit quality for a sustainable bank stock rally to materialize,'' Najarian said.

SunTrust's weaker profit makes it more likely the Atlanta- based bank, seventh-largest in the U.S., will be acquired, Najarian wrote. JPMorgan Chase & Co., the third-biggest bank, held preliminary talks with Washington Mutual, CNBC reported last week. Speculation also swirled around National City, which moved to raise new capital on Jan. 2 and cut its quarterly dividend in half to 21 cents.

``There is no bank in the United States that has exhibited less common sense than National City,'' analyst Richard Bove of Punk Ziegel & Co. said in a Jan. 2 report, citing repeated strategy shifts. ``The only real solution is to find a buyer.''

Mergers may be limited because sellers still refuse to cut asking prices even as bad credit rises, Sandler O'Neill's Fitzgibbon said.

To contact the reporter on this story: David Mildenberg in Charlotte, North Carolina at dmildenberg@bloomberg.net.

Last Updated: January 16, 2008 11:15 EST