Another bank analyst has added his name to the growing list of those who think the industry is headed for a poor 1995.

In a market outlook released this week, Frank R. DeSantis of Donaldson, Lufkin & Jenrette said that, after a short-tenn rally this quarter, next year is shaping up as tumultuous for the industry.

A return of credit problems and the inevitable shrinking of net interest margins will beat down the sector, he said, and only a handful of stocks will outperform the market.

"There will always be opportunities to trade the banks," Mr. DeSantis said, "but we would maintain a neutral weighting in bank stocks, even though valuations appear attractive." "The basis for being cautious is that returns are unsustainably high," he said, "and could easily disappoint investors, as they return to normal over the course of the next 18 to 20 months."

In fact, only 10% of DLJ's bank universe have fallen more than 25% off their 52-week nighs, indicating there is plenty of room to tumble.

Mr. DeSantis discounted the recent spate of rosy third-quarter earnings reports, arguing that many were artificially bulked up by low loan-loss provisions, In fact, the average regional bank is setting aside just 0.3% of loans, well below historical norms, he said.

With looser credit standards and an economic slowdown, loanloss provisions will have to rise next year, perhaps by as much as 50 basis points, he predicted.

Mr. DeSantis also takes issue with the hubbub surrounding the declining efficiency ratios touted throughout the industry.

Low efficiency ratios are directly tied to the dramatic rise in net interest margins, he said. These spreads explain 75% of the recent improvement in the industry's overhead ratio, he estimated.

Finally, Mr. DeSantis looks for net interest margins to constrict. The disparity between money market account and mutual fund yields will force banks to increase rates paid for deposits, he predicted.

"The way some bankers talk, you would think they can keep savings deposits below 3% forever," he said.

And even were the Federal Reserve to spur an increase in the prime rate, he continued, only 20% of the average bank's assets reprice with the prime.

Banks not as affected by rising interest rates will do better, be added.

His top picks include Citicorp, J.P. Morgan & Co., Chemical Banking Corp., and Comerica Corp.

In the near term, however, bank stocks will enjoy a rally, he said. The sector has simply been oversold, he explained.

The sector could also be helped by a concerted effort by the Fed to raise interest rates, which would temporarily dispel inflation fears.

A solid victory by the Republican Party in the mid-term elections next week would also help banks, Mr. DeSantis said. Other analysts agreed the sector is at the beginning of a decline.

"I am in a pure stock selection mode," said Dennis Shea of Morgan Stanley & Co. Mr. Shea, who moved to a neutral weighting for the industry this year, said investors need to differentiate carefully among bank stocks and could no longer afford to be just high or low on the entire sector.

Bank stocks moved little Wednesday. But First Tennessee National Corp. fell $1.25 a share, to close at $46.25, after Wading near its all-time nigh throughout the recent downturn. Analysts attributed the decline to profit taking.

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