A Florida banking analyst is sounding the alarm about the high-flying share prices of some thrift institutions.
"I really believe the next correction is in the thrift stocks," said Deborah R. Beylus of J.W. Charles Securities Inc. in Boca Raton.
She recommends that clients sell shares of the four largest savings institutions in Florida, warning that "the party is over."
The "sell" ratings are for American Savings of Florida FSB and CSF Holdings, both in Miami; Coral Gables Fedcorp in Coral Gables, and BankAtlantic FSB in Fort Lauderdale.
Takeover speculation this summer pushed thrift prices to record highs. Many have traded higher than shares of commercial banks on a price-to-earnings basis. On average, the big Florida thrifts have appreciated 52% over the past year.
The phenomenon has not been limited to Florida. Shares of thrifts in other parts of the country, notably California and New England, also have soared this year.
But Ms. Beylus cautioned that merger plays on thrift stocks "are by no means sure bets" and that at current prices "the risk-reward tradeoff does not seem justified."
In part, that is because rising interest rates threaten to muffle thrift earnings by narrowing net interest margins and depressing mortgage loan volume by the end of the year.
"Unless you know for a fact the thrift is going to be bought, there is no reason to buy and hold a thrift stock at this point. You simply are not going to be rewarded," she said in a telephone interview.
"If you bought in 15 points ago, then get out now. Take your profits and run," she said. "These companies are just not worth what they are now trading at."
The analyst said it is possible that "we may see more situations like Hamilton Bancorp."
Shares of Brooklyn-based Hamilton tumbled earlier this summer after an announcement that it would be bought by New York Bancorp, also a thrift, for 12% less than the price the company's shares were trading for at the time.
"The lesson," she said, "is that some rational bidding still figures in the acquisition market," and takeover prices are not necessarily dictated by market prices. New York Bancorp is paying about 1.6 times book value for Hamilton.
When Ms. Beylus issued her "sell" recommendation, shares of both American Savings, which has put itself up for sale, and Coral Gables Fedcorp traded at 12.9 times expected earnings next year. CSF was at a price/earnings multiple of 6.8 and BankAtlantic at 5.9.
There are also some important factors about the thrifts themselves. American Savings is 48% owned by Ens, tar Corp., which was associated with junk bond financier Michael Milken and is currently in bankruptcy. BankAtlantic is a major Enstar creditor.
CSF Holdings is an unlikely seller, she noted, with more than 40% of the company owned by the Stuzin family. Coral Gables is a "plain vanilla thrift" that converted from mutual to stock ownership in March 1993.
American Savings has a loan office in Chicago that "dilutes the value of the Florida franchise" for a buyer, she said. CSF has operations in Virginia and California, but has sold its Ohio and Illinois franchises and is concentrating on Florida.
The Florida thrift stocks have receded a bit since the Federal Reserve Board raised short-term interest rates in mid-August, but the analyst thinks they should trade closer to their book values.
"Higher interest rates mean lower earnings for thrifts," she said. "Earnings dynamics suggest narrower net interest margins and, modest balance sheet growth for the next few quarters, with slower loan growth in the latter part of 1994."
Thrifts are more sensitive to rising interest rates than commercial banks because of the longer duration of their mortgage portfolios as well aS the absence of many sorts of fee-based revenues at banks.
"Thrifts typically depend on residential real estate, which is highly cyclical. The mortgage business remains a commodity product requiring a low-cost strategy," she emphasized.
The traditional thrift specializes in mortgage lending, with funding derived from nontransaction deposit accounts. Thrifts are usually not their customers' primary institution, with the relationship based on price and not loyalty.
But most price-sensitive depositors have already departed for mutual funds, she said. Meanwhile both regional banks and mortgage banking companies are increasingly competing in the home mortgage arena.
In short, thrifts have restricted pricing power over their products and face tighter spreads than do banks. Many that survived the savings and loan crisis in the 1980s are now being acquired by banks.
The run-up in Florida thrift prices was sparked in part by First Union Corp.'s acquisition of BancFlorida Financial Corp., Naples, and its subsequent purchase of Chase Manhattan Corp.'s branches in the same city.
Ms. Beylus pointed out that First Union had a weak presence in that part of Florida and found the acquisitions less costly than pursuing a branching effort of its own.
But the remaining major thrifts are in South Florida, where the state's three major banks are already well represented. Jacksonville-based Barnett Banks Inc. has the largest share of the state's banking market share, followed by First Union and NationsBank Corp.
The analyst said she feels it is unlikely that these superregionals will pay huge premiums to the stock prices of the savings institutions right now.
Nor are other banks now in the state likely to pay big prices for the thrifts.
"At this point I don't really feel an outsider would come in and buy these companies," said Ms. Beylus. "It wouldn't work for them, since it would not make them a strong player in these markets."
The analyst, who spent three years at Lehman Brothers before moving to the Florida firm, suggested that investors in the thrifts shift to undervalued bank stocks that will perform well in the current interest rate environment.
She has "strong buy" ratings on Barnett, which she called her "best pick," and on First Union. She has a "hold" rating on Atlanta-based SunTrust Banks Inc., assessing its shares as fully valued fight now.
Ms. Beylus focuses on banks she believes are "poised for the '90s," but she notes that the banking industry in general has "lost a little steam" from the point of view of investors.
"There is a sector rotation away from the stocks," she said. "Rate fears are still ingrained in investors minds." At the same time, "revenue definitely has slowed down, even though the banks are the healthiest they have been in years." For many investors, she said, this means there is "just not much of a story left. They are just ho-hum stocks."
But she also believes, along with many other industry analysts, that concerns about the impact of rising rates on banks is overblown.
"The banks focusing right now on the price-insensitive customers, the retail customers, will probably not see much shrinkage in margins," she says. Loan growth is also helping.
In addition, she said, "most of the margin compression comes from a change in rates rather than simply higher rates. So once rates stabilize, I don't see that margins will come under further significant pressure.
