Citing concerns about margin compression and high share prices, Anthony J. Polini, an analyst at Advest Inc., downgraded the banking and thrift sector to "market weight" from "buy" and cut his investment ratings for six regional banking companies Monday.
Mr. Polini lowered Wells Fargo & Co. of San Francisco, North Fork Bancorp. Inc. of Melville, N.Y., and Fifth Third Bancorp of Cincinnati to "buy" from "strong buy." He reduced Merrill Merchant Bancshares Inc. of Bangor, Maine, Wintrust Financial Corp. of Lake Forrest, Ill., and SVB Financial Services Inc. of Sommerville, N.J., to "neutral" from "buy."
A number of analysts have raised questions about the stock prices of companies heavily focused on mortgage and deposit businesses, and Mr. Polini said that thrifts are particularly vulnerable to rising interest rates. Not only will their net interest margins contract as rates rise and deposits require repricing, but they are also suffering during the current low-rate environment as consumers pay down their mortgages early, he said.
Thrifts and regional banks benefited in recent years when investors started looking for protection from the falling market for financials, but that party may now be over, as they are now seeking cheaper stocks with more upside, Mr. Polini said.
Because the share prices of regionals and thrifts are rising, it may be time to "take some money off the table," he said.
Thrift stocks actually slipped last week, after Astoria Financial Corp. of Lake Success, N.Y., said last week that mortgage prepayments would cut into its profits. The American Banker thrift index had fallen 11% since the announcement but fell 1.75% on Tuesday.
Mr. Polini said that Wells Fargo should be able to offset rising deposit rates and narrower margins with higher loan demand when the economy improves. Investors who keep their bank holdings may shift their portfolios toward companies that would benefit more from an economic rebound, he said.
As examples, he cited FleetBoston Financial Corp. (which he rates a "strong buy") and U.S. Bancorp (which he rates a "buy.")
