Stocks: PNC's Stock Has Analysts Taking Opposite Corners

Shares of PNC Bank Corp. were downgraded Friday by a Wall Street analyst worried about the Pittsburgh banking company's ability to increase profits.

Michael L. Mayo of Credit Suisse First Boston Corp., who cut his investment rating to "hold" from "buy," expressed "concerns about the sustainability of PNC's core earnings and an increasingly cautious industry stance."

The analyst also took issue with a "valuation adjustment" that PNC took in the first quarter.

"PNC realized a $142 million valuation adjustment for loan sales during the quarter which we believe is a backdoor way of recognizing potential loan losses," Mr. Mayo said.

A bank spokesman said Mr. Mayo's interpretation of the valuation adjustment is "contrary to what everyone else has said."

PNC, whose stock has performed well recently, got a boost on Friday from Sandra J. Flannigan, an analyst at Merrill Lynch Global Securities.

She reaffirmed her "accumulate" rating and raised her 12-month price objective from $59 a share, to $68. PNC shares fell 75 cents, to $59, on Friday.

Ms. Flannigan said in a note to clients that the new price target "could still prove conservative depending on management's success in shifting business mix, disposing of sub-earning businesses and reducing the balance sheet and earnings risk profile." (See related story on page 4.)

The analyst said recent earnings were "the best quality in our memory," pointing out that they did not include one-time securities gains or reductions in loan-loss reserves.

She said PNC's recent move to change its business mix lowers the company's risk profile and frees up $150 million to $200 million over the next 12 to 18 months. That capital can either be invested in faster- growing, higher-return businesses or used to buy back more shares of the company's stock, Ms. Flannigan said.

The assessments came while bank shares dropped back with broader markets.

The Standard & Poor's bank index lost 0.60% and the Dow Jones industrial average 0.35%. The S&P 500 was off 0.15% and the Nasdaq bank index 0.22%..

Shares of Mercantile Bankshares of Baltimore were down 6.25 cents, to $36.1875, after positive words from Collyn Bement, a banking analyst at Ferris, Baker, Watts.

"We believe consistent earnings and dividend growth, low operating costs, solid asset quality, strong capital position, and high profitability make Mercantile a core long-term holding in the bank sector," Ms. Bement said.

She said the most recent quarter's continued containment of operating expenses led to a favorable efficiency ratio of 47.9%. She also said superior asset quality led to a 44% reduction in loan-loss expense for the quarter. Total nonperforming assets decreased 17.3% in the quarter.

As far as loan growth goes and the bank's declining net interest margin, "the worst could be behind us," Ms. Bement said.

Mercantile's lead bank is beginning to show signs of increased loan demand, primarily on the commercial side, Ms. Bement said.

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