In an industry where an average approach produces average results, Morgan Stanley & Co. analyst Dennis Shea looks for something different.
"It's hard for a bank to grow above the average with a vanilla mix," says Mr. Shea, who was chosen as the top analyst for banks in the Northeast.
One favorite: Boston-based BayBanks. The self-styled L.L. Bean of banking, the company has been innovative in using technology, the telephone, and catalogs along with ATMs that allow them to compete against bigger players.
Other banks have an edge, he believes, because of specialized businesses. For example, he cites the securities processing at Mellon Bank Corp. and Bank of New York as pluses for shareholders. (All three of his current favorites have good dividend growth.)
While others are bullish about mergers and acquisitions, Mr. Shea remains a contrarian. He measures deals on a cash flow basis, rather than by the widely-used earnings-per-share dilution standard. As a result, he remains cautious.
Looking to the future, he expects normal credit costs and shrinking net interest margins to drive down the profits of regional banks.
He forecasts the average return on equity will fall from a cyclical peak of 17% to about 14%.