Wall Street issued yet more favorable reviews for banks Tuesday in the wake of a seven-week battering in the market that has cut prices sharply for many of their stocks.
At UBS Securities, analysts modified the bearish stance adopted six months ago. They upgraded banks to "market weighting" and affirmed "buy" ratings on two companies, Chemical Banking Corp. and Fleet Financial Group.
Reinforcing the neutral stance taken on the sector as a whole, UBS money-center analyst Brent B. Erensel upgraded the shares of J.P. Morgan & Co. to "hold" from "sell."
"Many of our concerns of last spring are now reflected in the stocks," he said. "The banks may actually perform well through the yearend, which is the season of dividend boosts and fourth-quarter earnings."
Vulnerability Persists
Further out, bank stocks remain vulnerable, with questionable momentum and poor psychology, but reasons for optimism also exist, said Michael L. Mayo, the regional analyst at UBS.
Technical factors are one. "The bank stocks are down as much as 18% from their peaks earlier in the year," he said.
That does not measure up to the average bank bear market - which lasts 13 months, with a 40% contraction in prices - said Mr. Mayo. But such market trends usually are triggered by events like credit-quality problems that do not exist now.
No Storm Clouds in View
"While it is possible that a derivatives meltdown could transfer an obscure crisis to all leading financial markets," Mr. Erensel said, "there are currently no signs of stress in the marketplace."
Meanwhile, banks now trade at a 40% discount to the Standard & Poor's 400 stock index on a price-earnings basis - the lowest in 20 years. And on the basis of relative dividend yield, the banks are at 127% of the S&P 400, versus 125% on average since 1961, he said.
Negatives Still There
Among the bullish factors for banks, Mr. Erensel and Mr. Mayo noted, interest rates and inflation are subdued, capital ratios are high, efficiency is improving, and injurious competition from thrift institutions has abated.
On the other hand, revenue growth is "spotty," and deposits are being lost. Meanwhile, excess capacity continues as a drag on the industry, as do high structural costs for branch networks.
Besides Chemical and Fleet, the analysts particularly like Banc One Corp. and Wachovia Corp.
They also recommend First Bank System Inc., Bank of New York Co., First Interstate Bancorp, First of America Bank Corp., Huntington Bancshares, Mellon Bank Corp., and Shawmut National Corp.
Kemper Optimistic
Also weighing in with new bank ratings Tuesday was Kemper Securities, Chicago. It initiated "strong buy" ratings on First Union Corp., Crestar Financial Corp., Amsouth Bancorp., and BB&T Financial Corp.
Kemper also put initial "long-term buy" ratings on Wachovia, NationsBank Corp., SunTrust Banks Inc., and SouthTrust Corp. The firm issued an initial "hold" rating on Barnett Banks Inc.
