Despite the recent drubbing taken by bank stocks, at least one Wall Street analyst's outlook for bank stocks has brightened.
Francis X. Suozzo of S.G. Warburg last week changed his weighting on regional and money-center banks to "overweight" from "neutral" and upgraded Banc One Corp. and Wachovia Corp. to "buy" ratings from "hold."
The slide in bank share prices since the third-quarter earnings is "a correction within a long-term secular bull market," he said.
"The operating environment for banks remains unusually hospitable and investors will likely become more confident about the outlook for earnings growth in 1994 and 1995." Mr. Suozzo said.
Prices Seen Near Lows
Bank stocks are likely near their lows now, trading at 60% of the overall stock market's price-to-earnings multiple, he said. Without apparent problems, they may enjoy "a steady upward revaluation to 75% or 80% of the market within the next two years."
He said he expects banks "to deliver total returns of better than 20% through the end of 1994, twice the expected returns in the market."
Mr. Suozzo acknowledged that concerns about banks' revenue prospects and vulnerability to interest rates movements are "unlikely to dissipate soon." But the fears now seem to be fully reflected in the share prices, he said.
Optimistic About Regionals
As a result, he believes regional banks will outperform the market in 1994.
In addition to upgraded Banc One and Wachovia, Mr. Suozzo initiated a "buy" rating on Society Corp. He said stocks of these well-regarded banking companies have been particularly oversold.
Shares of Banc One, based in Columbus, Ohio, have declined 13% this year, yet it is "one of the most profitable large banks in the country and has delivered consistent 12% to 15% gains in earnings per share over the past 15 years."
He did not express concern about the bank's active use of interest rate swaps, which earlier last week led Prudential Securities analyst George M. Salem to remove his "buy" rating
Wachovia Management Lauded
Mr. Suozzo termed North Carolina's Wachovia "arguably the best managed bank in take country." He said it is on track to earn $2.80 per share in 1993, a 13% increase, with further 10% gains likely in both 1994 and 1995.
Cleveland's Society Corp., which is expected to merge next spring with Keycorp, based in Albany, N.Y., is especially undervalued, he said.
"Concerns about the merger have caused the shares of both companies to fall sharply, with Society's shares now 24% below its 52-week high," the analyst said. At Society's current share price, the new Keycorp sells at just 8.0 times his 1994 earnings estimate and 1.66 times pro forma book value -- a 12% discount to the average regional bank.
Against the Flow
Mr. Suozzo's change of heart bucks the trend among analysts. many of whom have recently, soured on bank stocks.
One notable example: Thomas K. Brown, a bank analyst at Donaldson, Lukfin & Jenrette Securities Corp., and one of the more bullish analysts in recent years has pronounced that the three-year-old bull market ended "at 10:30 a.m. Eastern Time on Oct. 16" when Morgan Guaranty Trust Co. of New York cut its prime lending rate to 5.5% from 6%.
Nevertheless, the DLJ analyst does not think banks "have entered a multiyear bear market trend" as they did in 1986, when rates were rising, the economy was heating up, and "highly dilutive bank acquisitions were widespread."
Bank stocks inched up Friday as the bond market rallied.
The 30-year bond gained ground, pushing the yield down to 6.26%. The Dow Jones Industrial average lost 3.63 points, to close at 3,683.95.
The only sizable gain among major bank shares was recorded by Huntington Bancshares. Its stock jumped $1.125, or 4.6%, to $22.75. Otherwise, most gains in bank stocks were modest and some major banks were unchanged in light trading, which ended at 1 p.m.
