With credit quality suddenly a bigger concern, one analyst is looking to history to find companies with proven ability to ride out economic downturns.
After last week's profit warnings from Wachovia Corp. and Unionbancal Corp., Chris Orgielewicz, an associate director at Sandler O'Neill & Partners of New York, reviewed the records of 35 U.S. banking companies with assets of more than $20 billion to identify the ones that were successful in containing credit costs during the most recent recession. The idea is that the same companies will also have the best chances to succeed in the next downturn.
Mr. Orgielewicz looked at 1991, the year that saw the bottom of the last credit downturn, and identified Regions Financial Corp. and SouthTrust Corp., both of Birmingham, Ala., and BB&T Corp. of Winston-Salem, N.C. as companies likely to outperform.
To pass the test, the companies had to have had net chargeoffs of less than 1% of average loans in 1991 and ratios of nonperforming assets to total assets of less than 1.5% at Dec. 31, 1991. He also limited his list to companies with price/earnings ratios under 10-times their estimated 2000 earnings - because investors in those companies would be buying relatively cheaply. "Each of [them] continues to compare favorably to peers regarding asset quality based on data for the first quarter of this year," he added.
Mr. Orgielewicz said Marshall & Ilsley Corp. of Milwaukee, and Northern Trust Corp. of Chicago, were among the best in terms of 1991 asset quality, but "the current P/E ratios were not low enough to meet our test. One reason for the higher multiples is the high degree of fee-based revenues," which give these companies more stable earnings in a rising interest rate environment, he said.
Looking at the track record of a bank during a recession generally "makes sense," said Joseph A. Stieven, an analyst at Stifel, Nicolaus & Co., a St. Louis investment firm. But he also said that he considers management quality an important factor.
If "your credit policy is not good since the last year, you are in big trouble," Mr. Stieven said.
"While leadership is very important, a bank that passed our screens but now has a new CEO may continue to be among the safest havens for bank stock investors today," Mr. Orgielewicz wrote.
In trading Wednesday, bank stocks slipped on another credit-related profit warning from Pacific Century Financial Corp, of Honolulu. (See story, below).
Among Mr. Orgielowicz's picks, Regions shares fell 2.96%, to $20.50; South Trust 1%, to $24.75; and BB&T 2.15%, $25.5625.
The American Banker index fell 2.28%, while the Dow Jones industrial average was up 62.6 points, or 0.60%, to 10497.4