Shares of Chase Manhattan Corp. slipped another notch Wednesday after George M. Salem of Prudential Securities Inc. cut his rating to "hold" from "buy" on concerns about higher interest rates.
"Everybody is waiting for the next shoe to drop on rates," the analyst said. "In investors' minds, money center banks are more vulnerable than regionals to the threatened rate rises," he said. "Chase seems to have greater vulnerability to rising rates than some other money centers."
Down 9.5% Since June 13
Chase shares were off 87.5 cents to $36.25. The New York bank's stock is down about 9.5% from its 52-week high of $40 on June 13.
Mr. Salem had elevated Chase to "buy" status on May 18. That was a day after the Federal Reserve Board pushed up short-term rates for the fourth time this year and signaled a respite from further credit tightening.
Bank stocks - including Chase - performed well for the next six weeks, but have recently stalled amid growing speculation that the central bank may raise rates again, perhaps as soon as next month.
In the meantime, Mr. Salem and other analysts were disappointed by aspects of Chase's second quarter earnings report. Several cut profits estimates and ratings in the wake of sober outlook for revenues offered by the company's own management
The net interest margin, down 43 basis points from yearend to 3.91%, was a particular concern.
The margin "would be adversely affected by any further increases in short-term and longer-term rates," Mr. Salem said. Further rate hikes seem in store in the second half of the year and "Chase's balance sheet is liability sensitive on a six-month basis," he added.
Pause After 3 Years' Growth
"After over three years of sharp, continuous earnings growth, it appears that earnings will either be flat or grow only slowly into next year," Mr. Salem said Wednesday.
"In a nutshell, revenues are slowing while operating expenses are growing at a pace slightly greater than revenues," he said. Meanwhile, the loan-loss provision is unlikely to decline much further, offering no boost to profits.
Mr. Salem said he was particularly concerned about the Chase management's warning that interest rates and fees on consumer loans "are under strong downward competitive pressures."
Credit Cards Worth 20%
The analyst noted that this covers the bank's credit card activities, which account for over 20% of Chase's net income, as well as mortgage banking and indirect automobile lending.
Consumer loans and fee income have been "the growth source" for Chase in recent years, "but now the outlook is clouded," he said.
"Mortgage banking is suffering from large origination reductions and fee wars across the board. Likewise, car lending rates are falling," he said.
Powerhouse Shutting Down?
Meanwhile, Chase's $10 billion card portfolio "hasn't grown for two years and is pressured by rate wars from low-rate competitors and rising funding COSTS."
Mr. Salem said his rating change signals limited potential for the stock, but he said it also has minimal risk as well since the shares trade below their June 30 book value of $37.64 and carry a generous 4.3% dividend yield.
Moreover, the stock trades at only 6.8 times the analyst's revised 1995 earnings estimate of $5.50 per share. Mr. Salem had previously anticipated profits of $4.75 next year.
Other Big Banks Hurt, Too
Fears of an imminent rise in interest rates sparked a selloff in many bank stocks on Wednesday.
Money center banks were hurt the most with Chemical Banking Corp. falling 87.5 cents to $37.375 and Citicorp 37.5 cents to $40.625. The superregional NationsBank Corp. slipped 62.5 cents to $54.125.
The latest outbreak of rate fears were spurred by a strong report on sales of durable goods.