Rosalind F. Looby joined Donaldson, Lufkin & Jenrette Inc. with guns roaring.
The analyst, who was hired about a month ago from Morgan Stanley, Dean Witter & Co., has added six banks to DLJ's coverage. They range in size from $1 billion to $10 billion in assets.
Three -- Commerce Bancshares of Kansas City, Mo.; Marshall & Ilsley Corp. of Milwaukee, and National Commerce Bancorp of Memphis -- were given "buy" recommendations.
The other three -- FirstMerit Corp. of Akron, Ohio; First Virginia Banks of Falls Church., and Hibernia Corp. of New Orleans -- were rated "market perform."
Ms. Looby said the mid-sized group faces challenges. "We believe that mid-cap valuations have been hampered by concerns about earnings quality and sustainability."
Also, Ms. Looby said credit quality "has peaked for the current economic cycle, which represents a headwind for this group going forward. Deteriorating credit quality, particularly on the commercial side, suggests that higher loan-loss provisions could curtail the group's strong earnings growth."
On the positive side, investors will pay premiums for management strength and credibility, earnings visibility and quality, Internet strategy, and franchise value, she said.
Marshall and Ilsley, she said, "has by far the most aggressive e-commerce strategy of any of the mid-cap banks we cover." The banking company "is positioning itself to compete vigorously on the Internet, both in its sizable data services business and its core bank, a strategy we believe will serve the bank well over the longer term."
Commerce Bancshares is "a well-managed bank with above-average growth prospects." She said it is "underappreciated by the market." The bank's unusually sophisticated technology, strong asset quality, and growth prospects "are not fully recognized in its valuation," she said.
Ms. Looby described National Commerce as one of the "premier mid-cap bank franchises" in the United States. "The company boasts clearly superior earnings growth and returns, earnings quality, strength of management, and a unique business model."
"Investors are increasingly willing to pay a premium for banks with superior track records and credibility," Ms. Looby said. "We think National Commerce possesses both attributes."
Legg Mason Capital Markets, based in Baltimore, also recently issued a report on regional banks that reflects Ms. Looby's negative view of the group as a whole.
"Concerns over higher interest rates, deteriorating asset quality, and possible year-2000 computer problems continue to hover over the industry, negatively impacting stock valuations," said Christopher Mutascio, an analyst.
But just as Ms. Looby has her favorites, so does Mr. Mutascio. His pick is Wachovia Corp of Winston-Salem, N.C. He says the banking company is a "high-quality consistent performer with outstanding credit culture, strong fundamentals, and superior management selling at a discount to its historical valuation."
