Shares of Chase Manhattan Corp. were downgraded by Merrill Lynch & Co. on Friday, because of high costs the bank faces in building an investment banking operation.
"The potential incremental investments are significant," said analyst Judah S. Kraushaar. So much so they may cut into the bank's expected 6% to 7% annual revenue growth and the cost-cuts still expected from the merger with Chemical Banking Corp.
Mr. Kraushaar sliced his rating on Chase to "near-term neutral" from "accumulate," but maintained his "long-term buy" rating. The stock fell $3.875, to $121.6875, on a day most bank stocks dropped.
Ever since regulatory barriers dividing commercial from investment banking began falling, banks have debated whether to buy investment banks and risk losing their talent or build from within and risk the time and cost of such an effort.
Bankers Trust New York Corp., BankAmerica Corp., and NationsBank Corp., among others, have bought investment banks, but Chase has elected to build from within.
The bank has developed one of Wall Street's biggest corporate and high- yield bond operations, a major global trading division, and a big asset- backed securities group. But it has yet to build up its stock underwriting business, and that may not be cheap.
"Based on our sense of what it may cost to build a credit equities business alone, we think (expense) growth may jump by 2% to 3% annually," Mr. Kraushaar said. He added that stock underwriting business at J.P. Morgan & Co., the only other commercial bank to build its equities group, costs over $500 million per year, while it costs major investment banks around $1 billion.
Elsewhere, Interstate/Johnson Lane analyst John Mason downgraded shares of Wachovia Corp. Friday to "neutral" from "long-term buy," citing the stock's rise to $81 per share last week, from $61 in late August.
"That's one-third growth in one-sixth of a year," Mr. Mason said. "There's nothing wrong with the bank, but this is not the time to buy it."
A day after Mellon Bank Corp. said its offer to buy CoreStates Financial Corp. for over $17 billion was rejected, CoreStates shares jumped $1.4375, to $73.8125, as investors speculated that the Philadelphia bank will eventually sell to someone. Mellon shares fell $1.9375, to $52.9375.
And speculation grew on Friday that Advanta Corp. will sell soon. A second bidder has reportedly entered the fray, putting a possible sale to Fleet Financial Group on hold.
Prudential Securities analyst Jennifer Scutti said Friday that a fair takeout price for the company would be $44 per share. But excluding takeover speculation, she said, a fair price for Advanta shares would be $36 to $39. Advanta closed unchanged at $36.75.
