Fox-Pitt, Kelton Inc. on Wednesday changed its ratings on the shares of three companies involved in mergers.
Fox-Pitt upgraded Bank of America Corp. and Zions Bancorp. from "inline" to "outperform," and downgraded Prosperity Bancshares Inc. of Houston from "outperform" to "inline."
Bank of America's deal to buy the credit card company MBNA Corp. of Wilmington, Del., was announced in July, as was Zions' deal for Amegy Bancorp. of Houston. The Zions-Amegy deal closed Dec. 5; the B of A deal is expected to close Jan. 1.
One issue for Prosperity could be the timing of the deal; it was announced Nov 16. Another could be the company it is buying in the $243 million deal, the $1.1 billion-asset SNB Bancshares Inc. of Sugarland, Tex., about 20 miles outside of Houston.
SNB is wrestling with a low-yielding securities portfolio, hundreds of million of dollars of expensive borrowings, and serious pressure on its net interest margin.
Brent Christ, an analyst at Fox-Pitt, a unit of Swiss Reinsurance Co., said in a research note issued Wednesday that Prosperity will probably have only mid-single-digit earnings growth next year as it integrates SNB. It expects to complete the deal in the second quarter.
But Mr. Christ added in the note, "We think more leverage exists looking ahead to 2007 as deal-related cost savings begin to take hold and loan runoff subsides."
Campbell Chaney of Sanders Morris Harris says the $3.5 billion-asset Prosperity has a history of successful integrations, and notes it has bought two other Texas banks this year. "Prosperity has proven itself. That's why we still like their story," said Mr. Chaney, who has a "hold" recommendation on Prosperity's stock.
Meanwhile, Zions still has a little work to do.
Analysts who cover the Salt Lake City company initially said it spent too much - $1.7 billion - for Amegy. And they still do not expect sustained from the acquisition until 2007.
However, Fox-Pitt's report on the $41.7 billion-asset Zions said it has cost-cutting opportunities on the operational side. And Todd Hagerman said the acquisition of Amegy gave Zions "a continuous market to their existing footprint."
Buying Amegy, whose 75 branches were all in Texas, was Zions' entrance to the state, a hot market. Zions is in nine other states, including Arizona, California, Colorado, and Washington.
Sandler O'Neill & Partners LP analyst Scott Siefers said, "Texas is a little bit different than the rest of the country, but Zions has gone into new territory before." In May, Sandler O'Neill downgraded Zions' stock from "buy" to "hold."
Fox-Pitt said there is minimal risk associated with Bank of America's $35 billion deal for MBNA because of the potential for an "upside in synergies, which could come on both the funding and cost areas."
Fox-Pitt also said B of A will be in a good position to buy back stock next spring.
Shares of B of A closed down 0.11%, Zions rose 1.1%, and Prosperity gained 0.03%.
