Banks need to do a better job of predicting the future financial needs of the American public, says Nancy A. Bush, regional bank analyst at Brown Brothers, Harriman & Co., New York. Too often, she says, they've lagged a step behind, as they did in the mutual fund boom of the 1980s.

But Ms. Bush is optimistic about the industry, believing the nation's largest 25 banks are capable of challenging any competitor.

She sees no immediate problems looming for banks but worries that the competition for loans might weaken underwriting standards and spawn future problems.

At her post at one of the most venerable investment firms on Wall Street, she advises investors to focus first on the philosophy and skills of a bank's management.

Q.: What's your view of bank stocks right now?

BUSH: There are more conflicting signals than I can remember at a comparable point in the cycle for these stocks. It's a time to use careful judgment. In my career as an analyst I've watched these stocks go through about three complete cycels. We are in the sorting-out period in this one.

Q.: Do you see problems on the horizon?

BUSH: Not for at least a couple of years, but the competition among the banks for new loans is somewhat worrisome. It's the sort of thing that contains the seeds of problems later if [underwriting] standards are loosened.

There's a possibility that this could happen to some banks in some places, but I doubt it's likely in the Northeast among banks I cover. Memories [of loan problems] are still pretty fresh in this part of the country.

Q.: Could real estate lending be a trouble spot again?

BUSH: It can't be completely ruled out. I've recently heard a couple of disturbing anecdotes about some new real estate loans, such things as 30-year commercial mortgages being made.

Anyone who's prudent has to be concerned about things like this, but it's difficult to imagine any sort of industrywide problem in the near future.

Q.: Are you an optimist about the banking industry?

BUSH: I am, and I don't want to give an impression otherwise. There are some people with the idea that banks are basically relics left over from the past that are not relevant. They ask why they ought to invest in an industry that is losing ground and market share to other, newer financial services providers.

My answer is that while that might be true for the banks overall right now, the cream of the industry, the top 25 banks, are gaining ground.

They are becoming bigger players in financial services all the time. They are constantly becoming much better players as well. I don't see this changing. In fact, with banking consolidation going on, I see this trend accelerating.Picks & PansBank ratings by Nancy Bush Buy PNC Bank Corp. First Union Corp. Keycorp First Fidelity Bancorp. Fleet Financial Group Neutral Banc One Corp. First Bank System Inc. Bank of Boston Corp. Barnett Banks Inc. NationsBank Corp. SunTrust Banks Inc. Wachovia Corp. CoreStates Financial May Sell Mellon Bank Corp.

Q.: What's the most important factor for careful investors to consider about banks?

BUSH: Their management.

Q.: More so than the market a bank is in or its competitors?

BUSH: Absolutely. Remember that there has been a lot of trauma in some of the very best markets over the past few years. The real difference for the best banks was, and is, their management.

It's important, I would even say it's crucial, to get to know management and have confidence in them: their philosophy, their skills, their style.

Q.: What is the biggest problem banks face?

BUSH: Changing their image. Quite a few banks are well on the way to adapting to the changed financial climate. Some are even taking the lead. Still, they aren't seen by a lot of people in a positive light in contrast to other players, like the mutual funds.

Their marketing skills have got to be improved. They aren't telling their own story very well in some cases. Overall, I think it may be a matter of culture. These things aren't easy to change, but the most successful banks will find a way.

Q.: Could you give an example of the problem?

BUSH: During the 1980s, when they should have been thinking about new investment products, too many banks were still thinking about branches and deposit gathering.

The mutual fund boom was well in place, even mature, before the banks had decided they needed not only investment products but funds. Too many times they've been a step behind in this way. They need to be a bit more forward-thinking about the preferences of the American public.

Q.: Which of the banks that you follow are doing best at this?

BUSH: I would say First Bank System and Banc One. They are open to different kinds of thinking, especially about how younger consumers are going to want to bank in the future. First Bank System has done quite a lot with technology in the branches.

Banc One has the John Fisher legacy. They've always been proud of devoting a certain amount of resources to research and development.

Q.: What is your strongest "buy" rating at the moment?

BUSH: It's a tie between PNC Bank Corp. and First Union. PNC has a long history of conservative management. They're one of the most efficient banks. They've also been a disciplined acquirer of other banks.

Q.: But why has their stock been such a disappointment?

BUSH: The stock is quite cheap. It is off 5.5% in the past year and selling around only eight times my next year's earnings estimate [$3.70 a share]. I think the market misunderstands their acquisition of Sears Mortgage -- apparently on the idea that PNC overpaid.

But I expect this is going to turn out as a very smart move. It was also hurt by the whole set of worries about derivatives, which seems overblown.

Q.: What about First Union?

BUSH: First Union has put together an extensive branch network across the Southeast over the past couple of years, only half of which is at what I would say is a peak standard of performance as of now.

They've added a lot around Washington and also thrift branches in Georgia. Basically, they have a good product mix overall and a strong line of retail products in particular. When they get all of this up to speed, the results should be impressive.

Q.: You also recommend the new Keycorp?

BUSH: Keycorp after the Society Corp. merger is something of a laboratory company. A lot of people are looking at it as the blueprint for future mergers of equals.

This is quite a burden for a company to carry. A comfort factor for investors is needed. That will take a while, but I think they are going to turn out to be a winner. Right now, the stock's valuation is tremendously attractive.

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