Wells Fargo & Co. and First Interstate Bancorp got endorsements from Wall Street on Wednesday after reporting strong second-quarter earnings.
Wells was added to PaineWebber Inc.'s "focus list" of buy-rated stocks, while First Interstate was raised to "accumulate" from "hold" by Natwest Securities Corp.
In both cases, analysts said lower loan-loss provisions and writeoffs were the crucial factors in the higher earnings.
Growth Still Meager
But revenue growth is weak for the banks, with no upturn in the California economy on the horizon, analysts said.
On a day when bank stocks were narrowly mixed, Wells Fargo rose 75 cents to $110 in late afternoon trading, while First Interstate gained 25 cents to $64.875.
The endorsements came although shares of Wells and First Interstate have risen strongly already this year. First Interstate shares are up about 39%, while Wells' stock is up about 30%.
In contrast, the American Banker index of bank stocks has risen about 7.5% this year.
But earnings were better than expected at both banks, leaving room for further stock-price increases, the analysts said.
Lawrence W. Cohn of PaineWebber cited "rapidly improving" asset quality at Wells in hiking his estimate of earnings this year to $9.05 per share from $7.70. In 1994, he expects $12 per share, up from $10.80 previously.
In the second quarter, Wells earned $2.46 per share, up from $1.33 last year and well over Mr. Cohn's estimate of $1.65. The primary reason for the spurt was a loan-loss provision of only $55 million versus $133 million last year.
On a Short List
The analyst said he thinks the bank's stock can reach $150 within 12 to 18 months.
The "focus list" is an investment tool for PaineWebber's retail brokerage customers. It contains up to 30 recommended stocks. Shawmut National Corp. is the only other bank stock on the list.
Mr. Cohn said he thinks California's economy is "bottoming out," and that problem loans will continue declining for Wells, allowing the bank to for-go further large additions to its loan-loss reserve.
He does not expect an upturn for the state soon, but thinks improving credit quality at Wells provides a large amount of leverage for earnings gains.
The analyst does not expect "any loan volume until the first half of next year."
Trimming Credit Costs
Improved asset quality is also driving earnings at First Interstate, said Stephen Berman Natwest.
The bank this week posted second-quarter earnings of $1.60 per share, up from 75 cents a year earlier. It said it expects its nonperforming assets to fall to 1% of assets by yearend from 1.15% on June 30.
"The company has gone through a period of aggressive chargeoffs and reserve building," Mr. Berman said. "While revenues are sluggish, this fall in credit costs is flowing back to earnings."
But the analyst said his 12-month price target of $70 does not provide enough upside potential for a "buy" recommendation. Rather, he suggested investors buy the stock during price declines.
Seen as Takeover Target
Mr. Berman also said he thinks First Interstate remains a candidate for acquisition "in two or two-and-a-half years."
First Interstate frequently was mentioned as a takeover target several years ago, with Wells the most likely suitor. The recession in California has muffled such talk.
But by yearend 1994, said Mr. Berman, First Interstate's book value will likely be near $50 from the current $46.
Assuming a takeout price of twice book value, based on its valuable francise, the purchase price in a deal could be $100 per share.