Lehman Brothers raised its rating Monday on City National Corp. of Beverly Hills, Calif., expressing the view that the company has brought its credit quality issues of concern for some time under control.
Equity analyst Brock Vandervliet upped his rating to strong buy from market perform after meet with the chief financial officer and chief credit officer. Mr. Brock said they reassured him that they have addressed credit quality deterioration at City National. Its nonperforming assets have not dropped, but Mr. Vandervliet said in an interview that he felt comfortable raising his rating because the reserve-to-loan ratio, 2.07%, is higher than the 1.50% maintained by most midcap banks.
By the end of 2000, City National had reduced its exposure to syndicated loans to $192 million, less than 3% of its total loan portfolio, from $537 million, or 10%, a year earlier, Mr. Vandervliet wrote in a research note issued Monday.
The company also increased its granularity, he wrote, by reducing the size of its average loan to $3.1 million by the end of last year, down about 35%. The smaller each loan is, the smaller the risk for a bank should an individual loan sour.
We believe the direction of credit quality is the issue that has dogged the stock in the past year, Mr. Vandervliet wrote.
On a weak day for financial stocks overall, City Nationals stock was down 1.64%, or 61 cents, as of 3 p.m. Monday. The American Banker index of the top 50 banks ticked down 0.96%, and the index of the top 225 banks fell 1.29%. The Dow Jones industrial average was up 0.61%; the Nasdaq composite was up 0.71%.
Rosalind F. Looby, an equity analyst at Credit Suisse First Boston, has lingering concerns about City Nationals credit quality. Though she acknowledged that the company has made efforts to clean up its balance sheet, she remained unconvinced that the problem is completely solved.
Ms. Looby downgraded the stock to hold in the fall on concerns about the companys syndicated loan portfolio. She maintains that rating.
Late last week, Adam C. Barkstrom, an analyst at Legg Mason Wood Walker Inc. in Baltimore, initiated coverage for City National at strong buy.
In his research note, Mr. Barkstrom pointed to City Nationals commercial banking performance, its income from trust and investment services, and above-average return on assets as positive attributes. He also wrote that, despite recent credit quality problems, the company has a strong balance sheet.
Mr. Vandervliet points out that even though City National is close to Hollywood, it probably would not be hurt by strikes threatened by the Screen Actors and Screen Writers guilds. It is called the bank to the stars, not the bank for every actor and caters to affluent clients, he said. City National would be at risk only if both guilds strike for more than nine months and the action becomes a bigger drag on the whole region an unlikely circumstance, he said.