Wall Street analysts are growing increasingly leery about the earnings outlook for the nation's major banks.
The latest in a series of yellow flags was raised this week by Francis X. Suozzo of S.G. Warburg & Co., New York, who advised clients to reduce holdings of money-centers and West Coast banks.
"Reported earnings are running well ahead of real earning power at these companies," he warned. The results, he explained, are being propelled by flat or falling loan loss provisions and not by improving revenues.
While this has been true for some time, investors' willingness to pay for the phenomenon is finally nearing an end for the largest institutions, said Mr. Suozzo.
He also foresees a tough business climate ahead for banks as rising interest rates weaken the economy. And he does not expect banks' stocks to regain market popularity "until we are within six months of the next recession."
His is among several sober though far from apocalyptic bank forecasts that have emerged recently from the investment community.
"It is clear from fourth-quarter and 1994 results that the banking industry lost some momentum in the last half of the year," the banking analysts at Fox-Pitt, Kelton Inc. in New York said last week.
They cited a "lower quality of earnings growth in 1994" that was attributable "to credit cost reduction and not revenue growth."
Studying the same situation, the analysts at Keefe Bruyette & Woods Inc. in New York noted last month that only one of the nation's 50 largest banks would turn in higher earnings this year if the industry's results were adjusted for below-normal credit costs.
Mr. Suozzo had maintained his "overweight" portfolio rating on money- centers for three years, on the premise that they would outperform regional banks and the overall market.
But the fundamental outlook deteriorated through last year, he said. - "In 1994 there was on average a 9% decline in earnings power for these banks, which includes pretty steep declines for Bankers Trust and J.P. Morgan," he said.
The weakness was effectively masked by falling credit costs, but Mr. Suozzo said he did not consider results bolstered this way to be "real earnings."
This year, he expects an even the profitability numbers to stray even further from reality with reported results running 13% ahead of actual earnings power.
Mr. Suozzo arrives at his definition of real earnings power by studying individual banks' lending activities, estimating what the quarterly loan loss provision would normally be, and "stripping out nonrecurring gains or losses."
Besides Bankers Trust and Morgan, the banks in the analyst's money- center and West Coast group are Citicorp, Chase Manhattan Corp., Chemical Banking Corp., First Chicago Corp., BankAmerica Corp., First Interstate Bancorp, and Wells Fargo & Co.
Mr. Suozzo specifically cut investment ratings this week on BankAmerica and First Chicago, saying their stock prices already fairly reflected their real earnings power this year.
The analyst said he expected revenues from First Chicago's credit card operations - its main earnings producer - to grow by no more than 5% this year, although card receivables may swell by 15%.
First Chicago, like other major banks, is also facing the costs of major investments "in the corporate side of its business simply to keep up with changes."
"That was a factor for Chase last year and it is affecting Bankers Trust and Morgan also," he said. "I am somewhat concerned about expense levels."
On top of this, he said, the general global environment for trading in financial products, a concern for major banks, remains poor. "The fourth quarter was difficult, because of the emerging markets' problems and we can expect a poor quarter - perhaps even a poor first half - on this front," Mr. Suozzo said.