With credit-quality worries shaking investors' confidence in banks that rely on lending, banks with asset management businesses are getting more attention.
Mellon Bank Corp., PNC Bank Corp., First Union Corp., Chase Manhattan Corp., and NationsBank Corp. have all won endorsements from the analyst community in recent weeks.
"The fee income story is becoming more visible," said analyst Joseph Duwan of Keefe, Bruyette & Woods Inc.
The spotlight has been brightest on Pittsburgh-based Mellon, the commercial banking company with the biggest asset management business. Several analysts issued positive reports after a meeting at which Mellon discussed expanding Dreyfus, which it acquired in 1994, to include more equity funds.
Mr. Duwan recently reiterated a "buy" rating on the company, which derives 57% of its revenues from fee-related businesses.
Mr. Duwan also praised the company's efforts to develop its distribution capacities through introduction of the Lion Account, an asset management account similar to Charles Schwab & Co.'s OneSource account.
Mellon's 20.9% return on equity was the highest among its asset management peers. First Union followed closely with 19.5%; PNC, 18.8%; and Chase Manhattan, 16.7%, according to Keefe.
Analysts noted that 14 of Mellon's balanced or equity funds earned the highest scores from Morningstar, a fund rating firm.
Mellon had been criticized after paying a hefty price for Dreyfus-and, in 1992, for the Boston Cos. But now the investments are paying off, analysts said.
"The investment community is waiting for Dreyfus to grow more rapidly than it had, and for equity to pick up faster," said James M. Schutz of ABN Amro-Chicago Corp. "This is not a business where there's a magic strategy where people flock to your fund. You have to demonstrate performance from the right marketing and the right mix in your portfolio."
Mellon shares, which dipped $1.375 Tuesday, to $76.50, currently fetch 13.2-times Keefe's 1997 earnings estimate, on par with the Keefe index of 24 superregional and money-center banks.
Mr. Schutz, who has a "strong buy" rating on the Pittsburgh-based bank, said investors have yet to realize that the market has undervalued Mellon and that the stock could be in for a gain.
"Mellon has some good talent running it," Mr. Schutz said, "and doing all the right things. It takes time, but I'm satisfied with the progress they've made."
Analyst Judah Kraushaar of Merrill Lynch & Co., who raised his 1997 earnings per share estimate for Mellon to $5.75, from $5.70, reiterated medium-term "buy" and long-term "accumulate" ratings on the stock. He agreed that investors have not yet understood the growth prospects for the bank's investment services businesses.
Lawrence Vitale of Bear, Stearns & Co. reiterated an "attractive" rating for First Union's shares, which gained 62.5 cents Tuesday, to $87.125.
Also Tuesday, shares of PNC gained 37.5 cents, to $41.375. The S&P Bank index rose 0.45% to 507.69, while the Nasdaq index of small bank stocks inched up 0.39%, to 1,374.3. And the Dow Jones industrial average gained 51.57 points, to 6,858.11.
Separately, Lori Applebaum of Goldman, Sachs & Co. gave a boost to the Canadian banks, upgrading Bank of Nova Scotia and Toronto Dominion to "market outperform" from "market perform" and Canadian Imperial Bank of Commerce to the "recommend list" from "market outperform."
