Lehman Brothers' new banking analyst, Michael L. Mayo, upgraded his rating on NBD Bancorp Thursday to "outperform," saying past acquisitions of several Indiana banks are about to pay off.
He also cited an organizational shakeup by the company's new top management.
At his old firm, UBS Securities, Mr. Mayo had rated NBD a "hold."
But in a telephone interview Thursday, Mr. Mayo said he was pleasantly surprised after a recent meeting with the bank's new management team, led by chairman Verne G. Istook.
While most Wall Street analysts are unenthusiastic about the stock, they are missing the boat, said Mr. Mayo, who believes the banking company is finally poised for strong growth.
Mistakes Avoided
"NBD does not build 100-story office buildings, lend aggressively to Peru, hold on-site investor meetings, or have a strategy du jour," he wrote in a summary of the bank.
The company's credit quality, meanwhile, is "pristine," Mr. Mayo said.
"Acquisitions are undertaken only in territories management knows, such as the Great Lakes basin, and only if cost savings alone can eliminate dilution," Mr. Mayo pointed out, while capital and reserves are "bountiful."
NBD's integration of the Indiana banks has been hampered by its conservative approach, he said. For example, NBD reduced the banks' risk profile by conforming the percentage of commercial loans to that of the entire company, resulting in loan runoff, he explained.
Better Loan Growth Seen
However, he continued, that period is essentially over, and improved loan growth and efficiency should materialize by yearend.
But Frank R. DeSantis of Donaldson, Lufkin & Jenrette said loan growth across the industry is weak. NBD is a classic corporate bank, he said, and the question remains unresolved as to how it will raise revenue in a tepid lending environment.
The answer may be in strict cost control, he said, and it remains to be seen whether NBD can reduce costs. Mr. DcSantis has a "neutral" rating on the stock.
Mr. Mayo pointed out, however, that NBD is the largest bank in Indiana, Michigan, and suburban Chicago, where the regional economy is thriving, thanks to the turnaround in the automobile industry.
Cost-Cutting Plan
Mr. Istook also has announced plans to eliminate $100 million of expenses and flatten the corporate hierarchy, including reducing personnel and branches each by 10%, Mr. Mayo noted. The new chairman's predecessors did not even attempt such cost cutting, Mr. Mayo added.
As a result, Mr. Mayo assigned a six-month stock price of $35. The stock closed at $31.625 on Thursday, up 37.5 cents.
Mr. Mayo made another unorthodox move Thursday by selecting Banc One Corp. as his number one pick, essentially based on the reasoning that things cannot get much worse.
Mr. Mayo argued that Banc One's margin decline cannot continue at its current pace, and derivatives losses should recede.
Benefit from Nafta
The stock is a fallen angel, he said, which is set to recover. Its acquisitions should finally bear fruit through increased efficiencies.
The North American Free Trade Agreement should also be a boon for the company, he said.
Major bank stocks were little changed in Thursday trading. The Dow Jones industrial average rose 13.92 points to close at 3688.42.
Center Bank in Connecticut fell $1.375 to close at $15 after analyst Gerard Cassidy said merger talks with an unidentified suitor were over.
Albank Financial Corp., another rumored takeover target, fell back 87.5 cents to $26.50, after jumping $2.75 the previous day.
But Grove Bank in Chestnut Hill, Mass., which last month hired Goldman, Sachs & Co. to advise it on possible takeover offers, continued its rapid climb, rising 50 cents to close at a record high of $32.75.
