Janney: Sell Wilmington Trust

Wilmington Trust Corp. shares are up 45% since the company warned in July that profits would fall. It's as if investors have stopped worrying about credit risk and are just hunting for bargains, writes Janney Montgomery Scott bank analyst Stephen Moss in a report to clients this morning. But Janney doesn't buy it: "We remain concerned about credit risk and believe a capital risk is necessary." Moss confirmed his previous "Sell" rating.

Moss notes the bank's quarterly report marks 13.5% of its loans as "substandard," on the "watch list", or "doubtful"  as of June 30, threatening capital and profit levels. That rate is up more than two percentage points from March, as construction and business loans credits kept going bad.

But actual losses at Wilmington Trust aren't unusual, investor relations chief Ellen Roberts. Wilmington Trust charged off 1.54 percent of loans, annualized, in the second quarter, compared to 3.08 percent for a group of 44 regional U.S. banks. If the "substandard" and "doubtful" loans correlate to charge-offs, a lot of other banks will blow up long before Wilmington Trust runs out of cash.

Moss says Wilmington Trust needs to raise more capital, likely by selling stock, before it can by back its expensive federal government TARP investment; he adds that management is resisting the idea, not wanting to dilute shareholders of the du Pont-founded commercial bank and investment administration company.

Precisely, says the bank's Roberts:  "We are well above the levels to be considered well-capitalized," even without the government's invesment. Wilmington Trust, she adds, won't dilute its institutional investors just to give brokerages more shares to trade.