NEW YORK -- After declaring Monday that the bull market in bank stocks was over, analyst Thomas Brown at Donaldson, Lufkin & Jenrette has now cut his ratings on seven banks.
Mr. Brown had been one of the biggest bulls on bank stocks. He changed his mind after Morgan Guaranty Trust Co. cut its prime lending rate 50 basis points to 5.5% Monday and after analyzing third-quarter earnings reports, which he considered uninspiring.
"With the prime rate coming down, that will cause further margin pressure, pressure on net income growth, and more negative earnings surprises," said Mr. Brown, who expects other banks to follow Morgan's lead.
"This is a stock market where positive momentum and positive earnings surprises are the drivers."
Favors Cuts to Market Weight
Mr. Brown said that he expects bank stocks to perform in line with the market. He recommended that clients reduce their bank stock portfolios to market weight, or 5.5% of their equity holdings.
"If there is a bias in the group, it is toward underperformance," he said.
Banks that have reported third-quarter earnings have show disappointing gains in net interest income, while net interest margins have shown weakness, Mr. Brown said.
On Tuesday, he downgraded Fleet Financial Group Inc. and Magna Group Inc. to "neutral" from "very attractive." Synovus Financial Corp. was downgraded to "neutral" from "moderately attractive." And U.S. Bancorp and NBD Bancorp were lowered to "unattractive" from "neutral."
The 1994 earnings of both U.S. Bancorp and NBD are dependent on growth in net interest income, Mr. Brown said.
In addition, Cullen-Frost Bankers Inc. and UJB Financial Corp. were both but to "unattractive" from "neutral."
Both are overvalued on their fundamentals because of takeover speculation, said Mr. Brown.
He is keeping six banks on his recommended list: Citicorp, Bank of Boston Corp., Signet Banking Corp., State Street Boston Corp., Wells Fargo & Co., and Norwest Corp.
He said that he expects these stocks to continue to outperform the market. The earnings gains of those banks are not dependent on growth in net interest income. And their valuations are attractive, he said.
Signs that the bull market is flagging have been apparent all year. The sector has been through several selloffs, sparked by investor concern about earning growth.
Many regional stocks have not bounced back from the last prolonged decline that lasted for about six weeks this spring. The S&P 500 index is up 7.5% this year. Mr. Brown said the 60 banks he follows are up 6.7%.
In that group, though, are some names that have dramatically outperformed the market. For example, Citicorp's shares are up 60% this year, Wells Fargo & Co.'s shares are up 53%, and Signet's shares are up 49%.
Selloff Slows Down
Bank shares continued to slide Tuesday, led by Morgan's loss of $2.25, to $72. But the selloff touched off by the release of third-quarter earnings reports and Morgan's rate cut slowed down.
A few banks that posted the biggest losses in the past three days showed gains. Wells Fargo was up $1.625 to $118.25 after the bank announced its earnings, which confirmed that credit quality is improving even if the core business didn't show much growth. Last week, the shares traded at $131.625, a record high.
First Interstate's shares rose $1.25 to $62.
The selloff has sent even some bullish money mangers to the sidelines after taking profits.
"You can't stop an avalanche," explained one money manager who had 30% of his portfolio in cash.
Some analysts were heartened by the gains.
"People are starting to feel like they threw out a lot of babies with the bathwater yesterday," said John Leonard, an analyst with Salomon Brothers Inc.
Mr. Leonard said that for most banks, a cut in the prime rate won't reduce earnings by more than 2% to 3%.
Elsewhere in the market, Merrill Lynch & Co. lowered its intermediate-term rating on Chase Manhattan Corp. to "neutral" from "above average." Merrill's long-term rating on the stock is still a "buy."Donaldson'sDowngrades Old rating New rating VeryFleet attractive Neutral VeryMagna attractive Neutral ModeratelySynovus attractive NeutralUJB Neutral UnattractiveCullen/Frost Neutral UnattractiveU.S.Bancorp Neutral UnattractiveNBD Neutral Unattractive