The best values available to investors in financial sector bonds will be banks and finance companies with heavy exposure to consumers, one Wall Street analyst says.

Credit card lenders, bolstered by flattening consumer delinquencies, tighter underwriting, and slowing credit expansion, offer opportunity for bondholders looking for appreciation over the next few years, said Allerton G. Smith, a bond analyst at Donaldson, Lufkin & Jenrette Securities Corp. in New York.

Companies with large consumer credit exposure, such as MBNA Corp., Bank One Corp., Capital One Financial Corp., Household Finance, and Wells Fargo & Co. are better values than banks that have a higher relative base of commercial loans, Mr. Smith said.

Broker-dealers and money-center bonds have less room for improvement because of the decreasing quality of commercial loans and the potential slowdown in trading and underwriting by yearend. That means bond investors have a better chance of finding bargains with consumer lenders.

"Default rates are accelerating in the commercial sector right now," Mr. Smith said. "That has the equity markets concerned about the sufficiency of loan-loss reserves. It will be the commercial lenders that take the pain, not the consumer lenders."

Rising corporate defaults stand to undermine the asset quality of commercial banks, and this could ultimately lead to falling bond prices as credit deteriorates, Mr. Smith said.

"We are increasingly concerned about the ability of banks to sustain earnings against the backdrop of higher commercial defaults," Mr. Smith said. "As you look at the landscape, where you may be surprised and disappointed is in the commercial area, particularly in the large, nationally syndicated credits. What we are recommending is for investors in financial services paper to focus on the consumer-oriented companies."

Though asset quality at commercial banks is nothing to groan about, it has stopped improving this year. On the upside, the industry's problem-loans-to-equity-and-reserves ratio, at 4.99% in the second quarter, was only a tad higher than the 4.95% five-quarter average, according to DLJ research.

But loan-loss reserves declined to 1.56% in the second quarter, from 1.65% a year earlier. "The trend line is concerning us. We clearly have seen an inflection point where asset quality is no longer getting better," Mr. Smith said.

Banks such as New Orleans-based Hibernia Corp. and Centura Banks Inc. in Rocky Mount, N.C., have reported big commercial loans in default this year. Also, Iridium LLC, the high-profile mobile telephone venture, also defaulted on its bond payments and loan payments this year. The large commercial defaults have led investors to wonder what is next.

Meanwhile, the asset quality of credit card companies has shown signs of improvement in recent months, Mr. Smith said. For example, consumer delinquencies have been falling. Thirteen of 15 credit card companies tracked by DLJ improved. The decline in delinquency rates for the 15 companies fell 24 basis points from June to July.

Credit card underwriting standards have improved over the last two years. Moreover, Visa U.S.A. of San Francisco said consumer bankruptcies were 103,603 in August, down 7% from a year earlier and 1% from July.

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