Stocks: Analysts Reduce Projections For CoreStates' Merger

CoreStates Financial Corp.'s stock has swooned in the week since a private session with analysts in which the bank acknowledged its merger with Meridian Bancorp has not yet delivered the expected benefits.

Analysts who attended the May 22 session in the bank's Philadelphia headquarters said chief executive Terrence A. Larsen reported higher than anticipated merger expenses and lower than anticipated revenues, which made estimates at the October merger announcement unattainable.

Mr. Larsen acknowledged that the bank may have faced a tougher environment than anticipated as it was working through its merger. He cited challenges from other banks whose presence in the region was boosted by recent mergers of their own, including PNC Bank Corp., Summit Bancorp., and First Union Corp.

The statements by Mr. Larsen prompted a flurry of earnings-estimate revisions that dragged down the consensus 1996 estimate on CoreStates by more than 2%, to $3.90 per share from $3.98.

The stock price also has fallen, from $41.375 before the meeting to $38.875 at Wednesday's close.

"Meridian and CoreStates were engaged in pretty deep internal cost- cutting, and this may have sapped the morale and opened up competitive weaknesses," said Judah Kraushaar of Merrill Lynch & Co., who attended the meeting.

Mr. Kraushaar - who reduced his 1996 estimate for the company to $3.75 per share from $3.85 - said the bank estimated that about $90 million of expected pretax earnings haven't materialized in the year to date.

A bank spokesman, Gary Brooten, confirmed that revenue problems were discussed with analysts.

"We acknowledged that we had kept our eye off the revenue ball," Mr. Brooten said. "We felt that the revenue flatness during the fourth quarter of 1995 and the first quarter of this year were, to some extent, a result of the amount of attention we were focusing on completing our reengineering and putting the merger together."

Mr. Brooten insisted the bad news is now behind the bank. But some analysts were skeptical.

"Any time that a management purposely leads the Street down, you know that it's not because of what they think might be a momentary blip in the revenue stream," said Katrina Blecher, a bank analyst at Gruntal & Co.

"It's a pretty drastic thing to say that you may not meet consensus estimates, especially when this is turning out to be a good year for bank earnings," said Ms. Blecher, who cut her 1996 estimate for CoreStates to $3.80 from $4.

To be sure, while some analysts believed earnings estimates for CoreStates may have to come down further, others maintained their bullish stance on the stock.

Lehman Brothers analyst Michael Mayo maintained his "outperform" rating, although he reduced his earnings estimate to $4 from $4.10 for 1996 and to $4.65 from $4.70 for 1997.

"It seems as though revenues will improve, probably later this year," Mr. Mayo said.

"The presentation clarified the company's strategic direction," he said. "They showed that there are meaningful barriers to entry in many of their middle-market businesses."

Lori Appelbaum of Goldman, Sachs & Co. is another fan of the stock. "They'll likely get over 20% return on equity for 1996," she said. "I'm forecasting a buyback announcement by the fourth quarter, which could be as high as 10%" of shares outstanding.

Perhaps illustrative of the uncertainty surrounding the stock, Salomon Brothers' chief equity strategist, David Shulman, removed CoreStates from the firm's "recommended" list even while its bank analyst, Jeffrey Naschek, maintained a "strong buy" rating.

Mr. Shulman's move had the effect of reducing Salomon's rating of the bank sector to "market weight" from "overweight."

Banking companies now represent only 10% to 11% of the recommended portfolio, with Citicorp, Bank of New York Co., and General Re Corp. remaining on the list, said a Salomon Brothers official.

Analysts said that the unrealistic expectations surrounding revenue growth and cost-cutting after mergers are not an industrywide problem. "These are issues that apply to CoreStates rather than reflecting a broad experience," Mr. Kraushaar said.

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