Salomon Brothers bank analyst Carole Berger Tuesday downgraded six regional and superregional banks to "hold" from "buy," citing cyclical economic factors that could limit their earnings growth for the next two years.
"It'll be a more difficult operating environment in 1996 for all banks," said Ms. Berger, who pared her list of recommended bank stocks to 11 from 17, downgrading Banc One Corp., First Chicago Corp., National City Corp., Marshall & Ilsley Corp., Keycorp, and First Union Corp.
She pointed to decelerating loan growth, significant pressure on net interest margins, and an inevitable deterioration of credit quality from today's high levels.
Consequently, Ms. Berger reduced 1996 earning estimates for Banc One to $3.25 a share, from $3.50; Keycorp, to $3.85 from $4.05; Marshall & Ilsley, to $2.35 from $2.45; National City, to $3.15 from $3.30; and First Union, to $6 from $6.10.
She left her 1996 earnings estimate for First Chicago unchanged at $7.50 a share.
First Chicago has "done pretty well relative to the group since September," she said, "and its relative value now is not as attractive."
Ms. Berger said she has rarely cut this many banks off her recommended list in one fell swoop, but she emphasized that she remains positive on many banks.
"There are plenty of good banks that are fairly valued in the marketplace," she said.
Ms. Berger maintains "buy" ratings on Bank of New York Co., BankAmerica Corp., Citicorp, CoreStates Financial Corp., First Bank System Inc., First Interstate Bancorp, First Fidelity Bancorp., Fleet Financial Group Inc., Mercantile Bankshares, Midlantic Corp., and Wilmington Trust Co.
Other analysts agreed with Ms. Berger's assessment of the current credit environment.
"We're getting to the point in the cycle where the next focus in the market becomes credit quality, which usually happens during talk of an economic slowdown or recession," said Thomas Maier, an analyst at Kemper Securities. "That is why I feel like bank stocks won't be super performers as a group."
Mr. Maier has a "buy" on Banc One, Keycorp, and First Chicago, and he upgraded Marshall & Ilsley to "long-term buy" last month.
He pointed to the potential expansion of Marshall & Ilsley's data processing business as evidence for prospective growth.
The company is working on a joint venture with Wisconsin Energy Corp. to market data processing to other utilities.
Though data processing at Marshall & Ilsley is growing by about 20% per year, Denis Laplante of Fox-Pitt Kelton still rates the stock a "hold."
Mr. Laplante thinks the shares have been under pressure since the acquisition of Valley Bancorp, which caused a "significant up-front dilution."
Dilution from the acquisition has meant that data processing is a smaller part of Marshall & Ilsley's business mix.
Among the downgraded issues, Banc One ended the day at $29.50, up 12.5 cents; Keycorp was at $27.75, up 37.5 cents; and Marshall & Ilsley was down 37.5 cents, to $19.25.
Other decliners included First Union, down 12.5 cents, to $42.75; National City, 37.5 cents, to $26.50; and First Chicago, 62.5 cents, to $47.
In other market news, Fifth Third Bancorp gained 50 cents after rising more than a point Monday, closing at $50.25
Analysts speculated that the trading was in response to a presentation last week by Fifth Third's chief financial officer, P. Michael Brumm, who estimated 1995 earnings at $4.40 a share, well above analysts' $4.27 consensus view.
Bank stocks generally were mixed as the Dow Jones industrial average rose tktk to tktk while investors awaited action on rates from the Federal Reserve.
