Equity analysts previewing second-quarter earnings are giving midcap banks mixed reviews.
While, year-to-date, the sector is the best performing among the nine financial services sectors covered by Lehman Brothers, individual companies have had some very different results, according to Brock Vandervliet, a Lehman analyst. With less exposure to the capital markets and private equity markets and less emphasis on syndicated lending than their larger peers, second-quarter results should be reasonably good from this sector, Mr. Vandervliet wrote in a research report released Thursday.
"Like last quarter, we expect the majority of banks to meet or exceed expectations," he wrote.
He listed City National Corp., North Fork Bancorp., and TCF Financial Corp. as companies to keep an eye on, calling them "three franchises where we would put new money ahead of earnings." North Fork and TCF Financial should experience healthy revenue growth and benefit from de novo expansion and continued deposit growth, Mr. Vandervliet wrote.
Prudential Securities analyst David Trone said that City National's "likelihood to be on the upside is a surprise."
Its credit quality was "better than people expected and margin pressure should be mitigated by some good financial engineering," he said. "Now there's a chance that City National will see a 10% earnings per share growth this year."
Not faring as well are Regions Financial Corp., AmSouth Bancorp., and Wilmington Trust Corp., according to Mr. Trone and Mr. Vandervliet.
Both analysts expect Regions' second-quarter earnings to fall short, mostly as a result of its Morgan Keegan Inc. acquisition in March. Mr. Vandervliet warned that Wilmington Trust will be hit by margin erosion and flat retail banking and wealth management fees.
The only thing that may save Regions is strong performance in fixed-income trading, Mr. Trone said. Fixed-income propped up the second-quarter earnings already announced this week by some of the larger broker-dealers.
As for AmSouth, Mr. Trone said the company "is almost at the very bottom of midcap banks, with falling earnings and struggling credit." The banking company will need to take more credit writeoffs to cleanse its loan portfolio either this quarter or later this year, he said.
However, the bank should be able to benefit a bit from lower rates, so the second-quarter results will depend on how much, if any, loan cleanup it does. Despite all the negative factors, AmSouth' stock is performing as well as City National's stock, Mr. Trone said.
"Investors are overlooking a big drop in earnings," he said. "The market has not fully evaluated its credit situation."
One factor helping AmSouth stock this past month has been rumors of a possible merger with BB&T Corp. of Winston-Salem, N.C. In trading Thursday, City National shares rose 2.98%, and AmSouth's shares rose 2.28%.