Alex. Brown & Co. shuffled its deck of regional picks on Tuesday, recommending that investors discard NBD Bancorp shares and pick up those of Society Corp.
Mark Alpert, an analyst with the firm, initiated coverage of Cleveland-based Society with a "buy" recommendation, citing an attractive price-earnings multiple.
At the same time, his colleague John Heffern cut his rating on NBD Bancorp to "neutral" from "buy" because the stock is trading at a higher multiple than other regional banks followed by the Baltimore-based brokerage.
The analysts recommend switching from NBD to Society. "We think on a relative basis that Society has more upside potential," said Mr. Alpert.
Bigger-than-Average Drop
Society's shares, which traded as high as $37.25 this year, closed Tuesday at $30.625, up 75 cents. The shares have fallen 21% since mid-April, versus an 11% averag drop for bank stocks as a group.
Mr. Alpert estimated that Society will earn $3.25 a share this year and $3.60 in 1994. Society is trading at about eight times projected 1994 earnings, versus 9.5 times for other regionals.
NBD's shares are pricier, trading at 10.1 times projected 1994 earnings of $3.18 a share.
One reason for Society's low share price is that the bank, even with $25.6 billion in assets, is not widely followed on Wall Street. Society acquired Ameritrust Corp., another Cleveland bank, last year, expanding its assets by 70% and becoming the biggest bank in northern Ohio and northern Indiana.
Marriage Seen as Success
The merger has paid off, analysts said. In the first quarter, the bank earned 1.48% on assets and had a return on equity of 20.69%, one of the best performances in the industry.
"This is my favorite stock," said Mark Lynch, an analyst with Lehman Brothers.
Society told analysts it would reduce expenses at Ameritrust by $129 million. The bank's management says it has exceeded that goal, cutting $144 million so far.
Long Wait for Payoff
The bank's sizable trust business gained considerably from the merger, with trust and other fees accounting for about 40% of earnings.
But investors have some concerns. Society has made expensive acquisitions in the past, which have taken a long time to pay off.
Another worry is Society's aggressive use of interest rate swaps and other derivative products to hedge its balance sheet risk.
At the end of the first quarter, the bank had $5.4 billion in swaps and other derivative contracts, a much bigger portfolio than most regional banks.
Investors worry that those derivative contracts will blow up, or that Society will guess incorrectly on the direction of interest rates.
Plump Net Interest Margin
The swaps and derivatives helped Society report a net interest margin of 5.39% in the first quarter of 1993, a very wide spread. Joseph Duwan, an analyst with Keefe, Bruyette & Woods expects the second quarter margin to be about the same.
Some money managers and analysts disagree with the decision to downgrade NBD. "The shares are still worth owning," said Mr. Duwan, citing recent acquisitions in Indiana that are starting to pay off.
NBD's shares were off 12.5 cents Tuesday to $31.125.
Bank stocks and the bond market generally reacted positively to the small gain in the consumer price index for May, which was released Tuesday morning. Leading the way were Bank America's shares, up 87.5 cents to $44.75 and First Union Corp., up 87.5 cents to $45.
