BANGALORE, Oct 9 (Reuters) - Shares of most U.S. regional banks plunged on Thursday as rising concerns that the banks' credit quality is bound to deteriorate prompted investors to take advantage of the expiry of a ban on short selling.
"A lot of people are shorting regional banks today with the expectation that they don't have enough capital to withstand the asset quality storm that's coming in the next two quarters," FTN Midwest analyst Brett Rabatin said by phone.
Shares of Zions Bancorp (ZION.O), Fifth Third Bancorp (FITB.O), Synovus Financial Corp (SNV.N), Susquehanna Bancshares SUSQ.O and Fulton Financial Corp (FULT.O) fell between 15 percent and 25 percent.
U.S. securities regulators had, for the past three weeks, temporarily banned the practice of short-selling in more than 950 stocks as the credit crisis intensified. That ban expired midnight on Wednesday.
Short sellers borrow shares they consider overvalued and sell them in hopes of making a profit when the price drops. It is a legitimate form of trading that can prevent stocks from being overvalued, but often is blamed when a company's shares fall.
The pre-announced results of Whitney Holding Corp WTNY.O and United Community Banks Inc (UCBI.O) proved that credit quality has worsened, analysts said.
Shares of United Community, which forecast a huge loss for the third quarter on Monday, and those of Whitney, which expects to earn just half of what analysts forecast in the quarter, also fell on Thursday.
Shareholders' belief that the banks could rebound after the approval of the U.S. government's $700 billion bailout plan has taken a hit, analysts said.
Banks that have already not raised capital may find it difficult to do so now without any government support, FTN's Rabatin said.
"There are a lot of banks in the Pacific North-West and California, whose capital ratios may be questionable at the end of the year... there are banks in the more credit- and housing-impacted markets such as California and Florida," he said.
Raymond James analyst Anthony Polini said there were a few banks that may do well even in a recession but, under the current circumstances, investors were not differentiating between strong and weak banks.
U.S stocks tumbled for a seventh straight session on Thursday as investors bet recent moves by authorities worldwide to thaw frozen credit markets would not be enough to avert a global recession.
"I think it will be difficult to avoid a recession any more," Polini said. (Editing by Pratish Narayanan)