Most analysts agree that the fundamentals for depository institutions should remain positive in 1994. but some differ markedly on whether investors should focus on banks or thrifts.
Both camps concur, however, that the virtues of each sector will be reflected in the price of their equities as the year progresses.
Jerome I. Baron, chief financial services analyst al Josephthal Lyon & Ross Inc., New York, said investors should put their money in thrifts in the new year.
"The major difference between the two industries should be the rate of loan-portfolio growth," he said.
Edge Seen for Thrifts
Thrifts, he added, should have a significant edge because the bulk of their lending is for the purchase of a home, and home sales are at their highest levels since the records were set in 1978 and 1979.
"In general, we expect thrifts to grow their loan portfolios by about 15%, while banks are likely to have,a loan-growth rate of only 7%," Mr. Baron said.
"Recently, bank-loan demand has shown signs of strength, particularly consumer lending, but we would be surprised to see a significant resurgence in commercial demand before mid-year," he added.
Calls Banks a Better Bet
Joseph Battipaglia, managing director at Sterling Advisors, New York, said banks are a much better bet. He argued that the profile of bank-loan portfolios would not be as adversely affected as thrift portfolios if rates go back up.
Mr. Battipaglia also said that revolving credits, commercial loans, and financial services will expand more quickly in a strong economy, which would end up benefiting the banks.
"Because thrift stock prices have been battered, you could argue that their stocks are cheaper and have more upside potential. But on the operational side, banks are fundamentally better positioned and better able to take advantage of an improving economy," he said.
Sees Runoffs Declining
In his support of thrifts' potential, Mr. Baron pointed out that in October, the annualized rate of existing home sales exceeded 4 million for the first time since 1979 and that on a quarterly basis, the affordability of home ownership reached a 20-year high in the third quarter.
"A key factor to be considered is the volume of loan repayments," he said. "The result high rates of loan-portfolio runoff probably peaked two months ago and should decline throughout 1994."
Mr. Baron said that fewer than 10% of all home-mortgage loans now outstanding are candidates for refinancing.
He expects a continuation and possible expansion of the heavy demand for purchase money that mortgages experienced in 1993 - along with a reduced rate of loan portfolio runoff - to result in solid growth in the loan portfolios of thrifts.
Especially High on 3 Thrifts
The Josephthal analyst is especially bullish on three thrifts he feels should show substantial equity-price appreciation over the next 12 to 18 months: Collective Bancorp, Egg Harbor City, N.J.; FirstFed Michigan Corp., Detroit; and Greater' New York Savings Bank.
"I like Collective because it doubled its production of new loans in the last year and made intelligent acquisitions, which further boosted the rate of its earning-assets growth," he said.
Mr. Baron expects Collective's earnings to rise to $2.95 a share for the fiscal year ending June 1994 versus $2.28 a share in the preceding fiscal year, and reach $ 3.50 for fiscal 1995. A 12-to-18-month target on the stock should be $30 a share, he said. In late trading Monday, it was at $20.25, up 25 cents.
Mr. Baron also fancies FirstFed Michigan Corp.
"The company has a high earnings momentum that is largely built in because of large maturities of high-cost funds during 1993 through 1995," he said. "It has outstanding asset quality, charges off only seven basis points, which is about one-fifth of the industry average," he added, "it is strongly capitalized, and also is a low-cost, efficient operator."
He said that with both thrifts the downside risk for share prices was 5%. As is the case with Collective, he calculates FirstFed's upside price potential over the next 12 to 18 months at about 50%. It was unchanged at $20 Monday.
He said FirstFed should earn $2.35 a share for 1993, $3.25 a share for 1994, and $4.10 a share for 1995.
|A Sitting Duck'
He also favors Greater New York Savings Bank.
"The company has returned to operating profitability and should rapidly reduce its nonperformers, increasing its attractiveness as a takeover target," he said. "It's a sitting duck that has about $2.5 billion in core deposits which would cost little more to acquire than the premiums paid in the latest transactions for RTC zombie thrifts."
An Active Acquirer
Meanwhile, Mr. Battipaglia said a recovery in the Northeast would give a boost to Fleet Financial Group, Providence, R.I., which he expects to outperform its peers.
"Fleet is an active acquirer and should benefit from an expanding economy."
He said Fleet should earn about $3.60 a share in 1994, up from $2.94 this year. "I see no reason why this can't be a $45 stock in 12 months."
On Monday, shares gained 62.5 cents, to $34.25.
Likes US Bancorp Trust, Hubco
Mr. Battipaglia also likes US Bancorp Trust Co., Johnstown, Pa., calling it an "excellent acquisition candidate." He said the company should earn $2.64 a share in 1994, up from $2.40 a share this year.
"The stock is selling around $24 a share and has a book value of $23 a share. I have a target of $32 a share by the end of next year," he said.
Mr. Battipaglia characterized Hubco Inc., based in Union City, N.J., as being "well positioned in North Jersey, a very strong banking area."
He said the bank should earn $2.40 a share next year against $2.05 a share in 1993, and the stock, currently selling at about $22 a share, should reach $30 share by the end of 1994.
