BusinessWeek is reporting KeyCorp plunges on charge-offs.

Shares of Keycorp tumbled Wednesday after the regional bank said it expects loan charge-offs in 2008 to be higher than previously anticipated.

Key said it now expects charge-offs, loans that will be written off as not being repaid, to range between 1 percent and 1.3 percent of total loans during the year, up from prior estimates of 0.65 percent and 0.9 percent. Charge-offs could be even higher during the second and third quarters, Key said in its filing with the Securities and Exchange Commission.

The company cited rising losses in the residential homebuilder, education and home improvement loan portfolios.

Worst Possible Business Model

Minyanville Professor Bennet Sedacca is writing about the business model of Keycorp and other banks. Let’s tune in.

More on KEY and Others

What could be the worst possible model?

When a company pays out its entire EPS in dividends and then goes to market with a 9% preferred. Then it RAISES the common dividend. Come on!! Then it announces deteriorating fundamentals. Who is it?

Keycorp (KEY), Fifth Third (FITB), Regions Financial(RF) and Wachovia (WB).

What should they be doing?

Cut the dividend, lay people off and sell common equity while they can. If not, it could be curtains.

I pinged Sedacca with a question about the preferred rates and he clarified that Merrill Lynch (MER) did a deal at 8 5/8, Wachovia (WB) was at 8.409, and Citigroup (C) 8.3 and that preferreds are cratering.

KeyCorp Weekly

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Keycorp is down about 12% on the day, and Wachovia and Fifth Third over 4% each. The latter two are making new 52 week lows. There is no way those dividends hold and the same applies to Citigroup.

Banking Confessional Is Open

In a second post on the BKX Banking Index, Sedacca went on to say…

If my suspicions are correct and Stage 2 of Stage 3 of the Credit Crisis has begun, then we all want to pay attention to the chart below. I mentioned yesterday that the BKX was at critical support around 75. With Keycorp (KEY) this morning, the confessionals about the consumer have now begun. Just look at how the Regional Bank HOLDRs (RKH) trades with Wachovia (WB), etc. getting hammered.

But if we take out 75, next stop is 60-65. If we take out 60, which I think happens in Wave 3 in 2009-2010? Well, my target is 40 or so.

My firm continues to focus on short opportunities in regionals and will avoid credit risk for the foreseeable future.

$BKX Banking Index Monthly Chart

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RKH Regional Bank Holders Monthly

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Do those charts look like a second half recovery is coming? I think not. And given that regional banks are in general more tied to commercial real estate and consumer loans than mortgages, the worst is yet to come for banks in general and regional banks in particular.

Mike “Mish” Shedlock
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