Arguing that a continuation of the bond rally could lift bank shares still higher, analyst Raphael Soifer of Brown Brothers Harriman lifted his short-term ratings of BankAmerica Corp., Chase Manhattan Corp. and Citicorp to "buy" from "hold."
Mr. Soifer, who also raised his price targets for the three banking companies' shares, said he expects the bond rally to continue in the next one to three months.
But Mr. Soifer posits that a long-term bear market in bonds will resume in the second half 1997. Accordingly, he maintains his long-term "market perform" ratings of stocks, which implies that their returns should jibe with the S&P 500 over the next 12 months.
Mr. Soifer raised his price target for BankAmerica to the upper $120s; shares rose $2.25 to $120 in trading Monday. Mr. Soifer also raised his price target to $110 for Chase Manhattan, which rose $2.125 to $104.625; and he brought his price target for Citicorp up to $130; shares rose $1.875 to $123.50.
The moves come as analysts debate whether banks have insulated themselves against interest rate pressures.
Patricia Chadwick, chief investment officer at Chancellor LGT said that the lending crises of the 1980s, "put the fear of God" into banks, causing them get out of rate-sensitive businesses and concentrate on creating shareholder value.
She also she said the use of share buybacks, more evident than it's been in 30 years, has helped immunize the stocks from rate shock.
"I wouldn't deny that bank stocks would come under temporary pressure to interest rates, but even if they cease to have multiple expansion, they've still got earnings growth as a defense mechanism," Ms. Chadwick said.
Analyst Frank Suozzo of Alliance Capital agreed that while a "knee-jerk" reaction by bank investors to inflation news usually occurs, such news typically doesn't affect long-term trends in earnings growth and shareholder-value creation.
"We've got above-average commercial credit quality, effective use of operating buybacks, and sustained double-digit earnings growth for the foreseeable future," Mr. Suozzo noted.
Price/earnings ratios "are a fiction of the times," Mr. Suozzo said. "We're in a very good environment politically, economically, and from a regulatory standpoint.
"The good banks have proven their abilities to take advantage of their operating leverage, improve returns, and keeping earnings growing faster than revenue," he said. "I don't think that's changing."
Director of research Michael Coiro of Ferris Baker Watts added that the money-center banks have more sophisticated hedging strategies than in the past and earn more from fees than they used to.
"If interest rates do go up and the banks fall back, it's going to create a phenomenal buying opportunity," Mr. Coiro said.
Separately, analyst Anthony Davis of Dean Witter Reynolds cut shares of NationsBank Corp. to "accumulate" from "buy" and lowered 1997 earnings estimates to $8.20 from $8.55. Analyst George Bicher raised shares of NationsBank to "buy" from "neutral." In trading Monday, shares of NationsBank rose $1.75 to $122.25.
