The market prestige of bank stocks was jolted again Friday when Prudential Securities lowered its earnings outlook for the industry.
In doing so the firm joined several other Wall Street houses, including Donaldson, Lufkin & Jenrette Securities Corp., in saying bank profitability and stock valuations are unlikely to grow much further.
After prospering as the nation's economy expanded during much of this decade, banks may finally have run out of space for further dramatic improvement, said Prudential analyst Joel W. Silverstein.
"We're long into the cycle, and there's little room left for expansion of (price-to-earnings) multiples," he said. In particular, he said the prolonged Asian economic crisis will probably curb bank earnings.
Mr. Silverstein cut earnings estimates for 12 of the 15 superregional and money-center banks he covers.
In a notably sharp cut, he reduced his 1998 earnings estimate for Citicorp to $9.10 per share, from $9.65. Expectations for First Union Corp., which made several large acquisitions last year, were lowered to $3.80 per share, from $3.90.
The only banks unaffected by his revisions were Fleet Financial Corp., Bank of New York Co., and Norwest Corp.-companies whose stock lagged those of other banks in 1997, he noted.
Before joining Prudential, Mr. Silverstein followed banks at Deutsche Morgan Grenfell, where he was cited by American Banker for the most accurate earnings estimates of any banking analyst in 1996.
Mr. Silverstein issued no new investment opinions with his revised earnings picture, but he now rates two thirds of the banks he covers-10 of 15-as "hold." He recommends NationsBank Corp., Norwest, Banc One Corp., BankAmerica Corp., and Chase Manhattan Corp. as companies that still have "significant capacity for price-earning multiple expansion."
Mr. Silverstein's revised outlook was issued near the end of a disappointing week for banks stocks.
Though the Dow Jones industrial average surged beyond the 8300 mark, setting new records after regaining all the ground lost since last August, bank stocks went virtually nowhere.
Last week, through late afternoon trading on Friday, the Dow Jones industrial average had risen by 2.2% while the Standard & Poor's bank index was off 0.05%.
Investors cited lingering concerns born of the Asian economic crisis that have been around since the fall.
"There are still questions about quality of earnings, sustainability of trading (revenue), and questions about interest rates. People are still sorting all this out," said Doug Penn, bank stock analyst at American Express Financial Advisors in Minneapolis.
But he also said such worries might quickly dissipate as investors begin focusing on the next quarter within a few weeks.
Mercantile Bancorp. shares rose $2.3125, to $56.0625, on news the company will join the Standard & Poor's 500 index Friday to replace ITT Corp.
Joining the prestigious index usually gives stocks a boost, because index fund portfolio managers usually buy the stock and bid up the price.
Mercantile becomes the third bank to join the S&P 500 in 1998, along with Summit Bancorp and Northern Trust Corp.
Finance-related companies, including commercial banks, investment banks, and insurance companies, make up 16.69% of the S&P 500. Regional and money- center banks make up 8.47% of the market-weighted index, said Michelle Ruotolo, index manager at Standard & Poor's.
Shares of Hambrecht & Quist group fell $2.50, to $32.125, after The Wall Street Journal reported that takeover talks with Merrill Lynch & Co. broke off last fall over Merrill concerns with how Hambrecht sold its stocks.
Advanta Corp., which is to sell its credit card business Feb. 20, to Fleet Financial Group, had its senior and subordinated debt ratings downgraded to BB-plus from BBB-minus by Duff & Phelps Credit Rating Co.
Duff & Phelps said it made the move to reflect that the new Advanta "will be essentially a nonconforming mortgage lender in an increasingly competitive and challenging environment."
The ratings agency said Advanta has enhanced its risk management process and expanded its sources for originating subprime mortgages. But it also noted that since most of Advanta's mortgages were originated in 1997, more time is needed to see how their portfolios perform.
Shares of Advanta's class A stock fell 18.75 cents, to $30.125.
