An analyst who downgraded the former thrift Charter One Financial Inc. last week said he is concerned that the Cleveland company is expanding its retail branch network at a time when banks' deposits inflows are slowing.
In particular Oppenheimer & Co.'s Terry J. McEvoy questions Charter One's branching deal with Wal-Mart Stores Inc.
Mr. McEvoy downgraded the $43 billion-asset company to "neutral" from "buy" Thursday. Its share price is approaching his 12-month target price of $36, but he is not seeing enough investor interest to raise it, he said.
Charter One adopted a bank charter last year. "Results so far have clearly been impressive," Mr. McEvoy said in an interview Friday, but investors may decide to look elsewhere for better returns.
The company has shifted focus to offer more variety in consumer lending. To that end it added 118 branches (13 through acquisition) last year and plans to open at least 74 this year.
Two weeks ago it announced plans to open 67 branches over the next 20 months through the deal with Wal-Mart.
But deposit inflows, which have been strong at most banks since the market downturn in 2000, have weakened in recent months as the equity market has recovered. "Charter One's deposit-focused strategy may come under pressure," Mr. McEvoy wrote.
Federal Deposit Insurance Corp. data suggest that the company actually lost market share last year in most of the metropolitan markets it serves, such as Cleveland and Chicago, he said.
A spokeswoman for Charter One acknowledged that the FDIC numbers may point to that trend. But she offered that the data, collected by the FDIC in June 2003, probably reflect consumers' mortgage refinancing cashouts. Refi deals gave a temporary edge to companies that concentrate on mortgage lending.
It may be true that the FDIC statistics do not accurately reflect current deposit market share, Mr. McEvoy said, but, "I was surprised to see a company that is so focused and so successful lose market share" under any circumstances.
As for the branching deal with Wal-Mart, of Bentonville, Ark., Mr. McEvoy wrote, "While Charter One is one of the premier retail banks in the country, we think partnering with Wal-Mart may not have been the best choice."
His fear is that the Wal-Mart branches will not be profitable, he said.
Other analysts said they like the partnership. Bradley Ness of Friedman, Billings, Ramsey & Co. of Arlington, Va., said Charter One could well be as successful with Wal-Mart as it is with other retailers. He rates Charter One "outperform," and his target price is $40.
Charter One "has outstanding growth prospects," Mr. Ness said, though he conceded that investors are concerned that Charter One's share price may lag those of counterparts that focus more on commercial banking.
However, Mr. Ness said that the company is trying to transform itself and that its business deposits are growing fast, which would suggest that Charter One's shares should trade in line with those of commercial banks, he said.
Charter One's shares have been volatile lately. On Friday the stock fell 0.8%.
