In a bad season for banks in the stock market, few have fared worse without apparent reason than Republic New York Corp.
Republic's shares trade at only 120% of book value in contrast to the 145% average for regional banks - a steep discount that has started to attract the attention of analysts.
The company's shares regained some ground Monday, after being added to Merrill Lynch & Co.'s "focus list" - Republic's second rating upgrade in as many weeks.
The stock was up 62.5 cents a share, to $45.50, in late trading. Other bank issues were mixed, while stocks generally were lower on preholiday profit taking.
The focus list is Merrill's classification for special values among stocks. While adding Republic, analyst Judah S. Kraushaar downgraded both Sun-Trust Banks Inc. and National City Corp.
Misplaced investor fears are to blame for Republic's share price weakness, according to Thomas D. McCandless of Paine Webber Inc., who last week raised the stock to "buy" status.
"Why buy hamburger when steak is on sale?" Mr. McCandless said Monday.
The stock has been trading near its projected book value, he noted. The last time that occurred was during the 1990 recession. The analyst has a 12-month price target of $160 for the shares.
With interest rates rising this year, investors have apparently been fearful about Republic's net interest margin, which at 2.71% is well below the industry average of 4.36%.
Investors have been wary that the flattening yield curve would spawn a collapse in bank margins and dampen earnings.
But Mr. McCandless said Republic's margin is" structurally small" and is well managed.
Republic's low margin results from its unusually large investment portfolio and its atypically small loan portfolio, which counts for less than one-third of earning assets, the analyst explained.
Moreover, he said, Republic "has nearly always maintained neutral rate-risk position in its highly liquid balance sheet and has been able to maintain a relatively stabler margin on its core businesses through various interest rate cycles."
Republic's margin therefore should not be affected by the flattening yield curve across maturities of Treasury securities that results from rising rates, Mr. McCandless argued.
The bank's extreme liquidity the analyst added, also means investors have unfounded fears about Republic's being affected by any potential credit-quality problems in the banking industry.
Investors also seem to miss the uniqueness of Republic's franchise, Mr. McCandless said. One-third of its business is in international private banking, where client assets have grown at a 20% pace for more than 15 years.
Republic's management said this year that it hopes to make domestic private banking an equal profit contributor within five years.
The remainder of the franchise is divided between institutional business lines - including foreign exchange, gold bullion trading, and storage and other activities - and Republic's retail business.
The bank's retail franchise is the fifth-largest in the New York metropolitan area, but it probably has greater value than its size indicates because branches are clustered in strategically strong areas, the analyst said.
Mr. McCandless' $60 price target is based on a targeted price to earnings ratio of 10, versus only about 7 now, and a modest 124% price-to-book ratio.
Mr. Kraushaar, who could not be reached to elaborate on his rating changes Monday, cut SunTrust Banks to an intermediate neutral" rating and National City to intermediate above average."
Suntrust shares were off 12.5 cents, to $50, while National City rose 12.5 cents, to $25.25 in late trading.
PNC Bank Corp., whose shares have been among the weakest in the industry, got a limited vote of confidence Monday from Oppenheimer & Co. bank analyst Chris Kotowski.
He upgraded the stock to "market performer," from market underperformer." PNC was down 37.5 cents, to $22.25, in late trading.
"Because of its liability sensitivity, this stock trades like a leveraged bond fund," Mr. Kotowski said. "We upgraded because we believe long-term bond rates may have peaked."