Bank stocks stumbled again Thursday after a major Wall Street firm threw cold water on the industry's growth potential.

Saying the upside potential for the stocks had lessened, Judah Kraushaar of Merrill Lynch & Co. downgraded Chemical Banking Corp., Boatmen's Bancshares, and Bank of Boston Corp. to near-term "neutrals" from buys.

Boatmen's tumbled $2.275 to $50.75 on the news, while Chemical slumped $1.25 to $35.625, and bank of Boston eased 25 cents, to $22.75.

The downgrades were surprising in that Chemical, Boatmen's, and Bank of Boston have been among the hottest stocks in the industry.

Chemical has benefitted from optimism regarding cost savings from its merger with Manufacturers Hanover Corp. Boatmen's, based in St. Louis, is considered am aggressive acquirer of other banks. And Bank of Boston is viewed as a turnaround.

Mr. Kraushaar's actions also reflect his uneasiness about bank stocks in general.

Pessimism on Lending

He cautioned that loan growth will "remain disappointing" for banks during the rest of this decade and that net interest margins will eventually narrow, dampening results.

At the same time, industry overcapacity, while slowly being eased, will continued as a drag on profits, he said. Mr. Kraushaar said investors are advised to opt for banks "more likely to produce top-line growth."

On Wednesday, bank analysts at Smith Barney, Harris Upham & Co. dropped BankAmerica Corp. from their buy list, demoted J.P. Morgan & Co. to "underperform" from hold, and reduced Bankers Trust New York Corp. to hold from buy.

The Smith Barney analysts, Kristina E. Andersson and Alison A. Deans, said they moved because of continued sluggish loan demand and the possibility of an upturn in some interest rates.

BankAmerica was unchanged at $41.25, after dropping $1.25 the day prior. Morgan was off 62.5 cents, to $59.625, and Bankers Trust was down 12.5 cents, to $59.

Despite Rise in Earnings

Thursday's rout - only two of the top 50 banks in market capitalization scored gains - again came in the face of a rise in the overall stock market and impressive second-quarter earnings reports from banks.

The broader market was bolstered in party by H. Ross Perot's decision to give up his bid for the presidency. The Dow Jones Industrial Average ended the day at 3,361.63, up 16.21 points.

"The [bank] stocks have been declining on better-than-expected results," said Mark Alpert of Bear, Stearns & Co. "If these kinds of earnings reports don't help, it's hard to say what will."

|Time for a Breather'

Not all analysts think the banking sector's rally is over.

"I think we're seeing a trading correction after a long up-leg for these stocks," said John Leonard of Salomon Brothers. "It was time for a breather, but we're not turning violently negative."

George M. Salem of Prudential Securities Inc., who has been among the most bearish analysts over the past few years before turning positive on the industry early this year, found the downturn in the stocks this week to be "irrational and premature."

"You can be concerned about loan demand in the nineties, and I am, but why now?" he said. "I don't think this is the end of the rally. The bank stocks look pretty good for another couple of quarters. There is plenty of time to be selective and no need for a selling panic."

Yet other analysts are strongly bullish. "We believe all the stocks we are currently recommending have the potential to appreciate 20% or more relative to the market" said Ronald Mandle and Moshe Orenbuch of Sanford C. Bernstein & Co. in a report.

They have "outperform" ratings on Bankers Trust, Bank-America, Bank of Boston, Chemical J.P. Morgan, Barnett Banks Inc., Chase Manhattan Corp., Citicorp, First Interstate Bancorp, First Union Corp., Fleet Financial Group Inc., NationsBank Corp., Shawmut National Corp., and MBNA Corp.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.