A sweeping downgrade by Donaldson, Lufkin & Jenrette was the sharpest of a flurry of punches that bank stocks endured Thursday.
In cutting the banking sector to "market perform" from "outperform," DLJ cited high prices being paid for acquisitions, significant costs to prepare for the year 2000, and looming commercial loan problems as the economy cools.
"The Street will find itself trimming estimates by nickels and dimes" in coming months, predicted DLJ banking analyst Thomas K. Brown. "We're going into a slower growth, weaker economic situation."
Citing high valuations, Mr. Brown removed from his list of "action" stocks Chicago's Northern Trust Corp., which fell $1.5625, to $66.1875, for the day; and Cincinnati's Star Banc Corp., which slid 18.75 cents, to $55.75. He returned to the list Banc One Corp., which rose 62.5 cents, to $56.3125; and reduced to "market perform" from "buy" both First Tennessee National Corp., which dropped $1.25, to $65.125, and KeyCorp, which declined $1.25, to $71.
Mr. Brown's comments, during a conference call to investors, amplified a new tone of caution about bank stocks on Thursday as analysts fretted over signs of sluggishness in various industries.
For the day, the Dow Jones industrial average was off 1.63% and the Standard & Poor's 500 fell 1.53%. The S&P bank index dropped 1.55%, and the Nasdaq bank guide was off 0.57%.
Banks should perform better than industrial stocks in general in 1998, Mr. Brown said, but they still face significant challenges. "The rubber band will snap" on the multiples now being routinely paid for acquisitions, he said, and slower earnings growth will result.
Mr. Brown was particularly critical of NationsBank Corp., which he said has "blown smoke" at analysts and investors in statements about earnings expectations from its coming purchase of Barnett Banks Inc. NationsBank was up 18.75 cents, to $62.3125, for the day.
Mr. Brown also sees the merger market cooling as banks spend more time next year getting their systems to accept transactions dated beyond the year 1999.
Other analysts were vocal as well on Thursday. U.S. Bancorp fell $1.625, to $113.125, when shares were cut to "buy" from "strong buy" by Ben B. Crabtree of Dain Bosworth Inc.
BB&T Corp. was down 43.75 cents, to $63.8125, after a downgrade to long- term "market perform" by John W. Coffey at Robinson-Humphrey Co.
Trustmark Corp. fell $2.50, to $41.75, after a downgrade to "underperform" from "market perform" by Joseph Roberto of Keefe, Bruyette & Woods.
Shares of Trans Financial Inc. fell 56.25 cents, to $36, after Mr. Roberto's downgrade to "attractive" from "buy," saying shares have been run up considerably this year.
Hancock Financial Holding Co. dipped $2.75, to $60, after Keefe, Bruyette & Woods analyst Harold Schroeder reduced his rating to "underperform" from "market perform."
Some market observers maintain there is still plenty of life left in the bull market - that bank industry consolidation will continue strongly.
"We're in the midst of once-in-a-lifetime activity, and if anything, the activity is likely to increase over the next six months," said Michael Mayo of Credit Suisse First Boston.
