Bank of America Corp. (BAC) and SunTrust Banks Inc. (STI) stand to lose the most on home-equity loans if housing prices and employment continue to drop, according to a report by International Strategy & Investment Group Inc.
Earnings may come under pressure because the Federal Reserve and Office of the Comptroller of the Currency increased scrutiny of home-equity portfolios to ensure they’re being valued properly, and default notices rose in August, according to analysts led by Ed Najarian.
“If employment weakens more and home prices drop more, both the frequency of default and the severity of loss per default on home-equity loans could easily exceed the amounts assumed by banks in their current home-equity reserves and by bank analysts,” the report said.
Bank of America, the biggest U.S. lender by assets, is most vulnerable to home-equity losses among large banks, and SunTrust has the most risk among regional firms covered by ISI, Najarian wrote.
If home-equity losses increase by 20 percent, earnings at Charlotte, North Carolina-based Bank of America could be reduced 7.5 percent in 2012, and Atlanta-based SunTrust’s could drop 8 percent, the report said.
Bank of America dropped 24 cents, or 3.3 percent, to $6.99 at 12:09 p.m. in New York Stock Exchange composite trading. SunTrust dropped 3.5 percent to $19.22, while the 24-company KBW Bank Index slid 3 percent.