Investors' concerns over banks earnings in 1995 and beyond are behind a recent downturn in share prices, say Ronald I. Mandle and Mosche Orenbuch, analysts with Sanford C. Bernstein & Co.

Investors worry how banks will boost earnings when credit costs are reduced to normal. Those concerns have held down the relative price-earnings multiples for banks based on 1994 earnings estimates, even though balance-sheet quality and earnings stability have improved.

With the slipping share prices comes a buying opportunity for investors, said the two analysts. They said nine banks that they follow are 30% under their 12-month price targets.

Their top picks: NationsBank Corp., BankAmerica Corp., and PNC Bank Corp.

Still, Mr. Mandle and Mr. Orenbuch, who function as sell-side analysts, aren't as bullish as they were a year or two ago, when stocks were relatively cheaper. Nor is Sanford C. Bernstein, which has 13% of its portfolio in bank stocks, down from 25% about a year ago.

Q.: Why do bank stocks still have room to rise?

MANDLE: Banks have stronger balance sheets and less volatile earnings than they have had in the last 15 to 20 years. Credit quality has improved significantly in the past year and will continue to improve significantly. Capital is at a 30-year high.

The fact that banks were so traumatized by the experience of 1990 means that they have improved their credit standards. The relatively few loans that are being written right now are writen to higher standards, which means fewer credit problems in the near to intermediate future.

The biggest cause of volatility in bank earnings is swings in credit quality and we think that will have a dampened swing over the next few years compared to what we saw in 1990.

All of which means that bank earnings will be less volatile and the market will pay a higher multiple for that. We think stocks have room to improve their relative PEs.

Q.: Why do investors have the jitters?

ORENBUCH: Some bank stocks today sell at relative PEs that are lower on 1994 earnings than they were a year ago. The market sells at 16 times 1994 earnings. Some high quality regional banks sell at 9 times. That's kind of unusual. We certainly feel more confident in our 1994 earnings estimates today than we did a year ago.

We think that over time, as banks can demonstrate that their earnings growth is consistent and real the shares can show an improvement.

I think investors have a question mark in their minds about whether bank earnings are like car company earnings. Is the cyclical peak then followed by a decline in absolute levels of earnings? In that view, 1994 would be the peak of bank earnings.

We think earnings growth may decelerate after 1994, but that you will still see growth in earnings. I don't think there are any companies that we will see decline in earnings after 1994.

Q.: What makes you optimistic?

ORENBUCH: Part of investors' views about earnings after 1994 is rooted in their view of the competition in the industry.

You have to look at the banking business in two pieces. Some parts are more competitive than in the past and some are less competitive. The aspects that are a bigger piece of the banks profits are less competitive.

The ones that are more competitive are those products that are delivered nationally, over the telephone, such as credit cards and mortgages. But credit cards are less than 10% of the industry's profits.

Business that are delivered through the branch are less competitive than they've been, because of consolidation.

Banks have gone a good job in the past couple of years against their competitors, taking market share from thrifts on the deposit side, for example. And they make pretty good strides in distributing mutual funds.

Q.: NationsBank seems to attract all types of criticism. What makes it your top pick?

ORENBUCH: It is clearly one of the premier banking franchises in the country. It has a large network of branches in attractive markets, dominant market conditions in some branch markets, and certain key fee businesses.

There are two major concerns investors have about the bank. The general perception that they will buy anything that moves and that they can't control expenses.

I would submit that the risk to an investor in an acquisition relates to the amount of banks that a company acquires. These require a lot of management attention.

In the past five years or so, NationsBank has only bought two or three banks that weren't failed institutions. C&S Sovran was one. MNC Financial is another. And MNC is turning out to be a better deal than people originally thought.

NationsBank bought a healthy bank, with slightly better reserve coverage than NationsBank has and at a price that allows it to contribute to earnings even before cost savings.

On the other hand, they have done four transactions in the past year for nonbank assets. Each of those nonbank acquisitions will add to their management depth, rather than subtract from it.

They bought a couple of billion dollars of assets from U.S. West Financial Services. We think that this will immediately add 15 cents per share on an annual rate from the time it closes.

The acquisition of the Chrysler First assets, done earlier this year, was immediately additive to earnings. The acquisition of Chicago Research and Trading, which I view as strategically the right thing, is marginally positive from an earnings standpoint.

The venture with Dean Witter is only a few months along, but it has been doing better than anyone's expectations. Instead of costing a little bit at the outset, it will probably contribute a little bit. Investors view NationsBank as willing to expand helter skelter.

But they were willing to give up half the profits of their NationsBank Securities venture becacuse they recognized that Dean Witter had some skills they didn't have and it would take time to build those skills.

You can't keep adding all these things without analysts taking their estimates up. But they have been slow to respond.

Q.: What about cost containment?

ORENBUCH: This is a company that before 1988 had one of the lowest cost ratios among its peers. But because of the revenue gains they made in acquisitions, they lost momentum on the cost side.

But the question is, who can earn more money in 1996, a bank who has already cut their costs or a company with a somewhat bloated cost base with a management that has a history of controlling costs.

The consensus estimate is $5.50 or $5.60. We are at $6.00 Our price target is 75% relative PE, which equates to the low $70s. [Late Tuesday, the shares were trading at $48.875, off 87.5 cents.]

Q.: You haven't given up on BankAmerica?

MANDLE: They are the dominant bank in the West, which long term is one of the most attractive growth areas of the country. Right now there is tarnish on the gold of the Golden State, but we are getting near the end of a cycle.

Southern California is probably two to three years behind New England and we've been seeing some loan growth in New England in the past six to nine months. I think we'll see loan growth starting in California in a year, maybe earlier in northern California.

The rest of the West where BankAmerica operates is doing better. Arizona and Nevada are doing pretty good. Washington is suffering from Boeing layoffs, but those layoffs are less than they've been in past cycles.

BankAmerica in the mean time is cutting costs from the Security Pacific deal. I think they will exceed their $1.2 billion target. And I think we'll see further significant cost cutting, which is essential for a branch system like BankAmerica. This is a proactive management.

If they don't see revenue growth soon, I think they will launch another cost-cutting program. They launched a revenue generation program on July 1 for the branches to encourage them to sell products to customers. If they don't see significant revenue generation in a quarter or two, they will go on a cost-cutting program.

Q.: What has to happen to move the stock?

MANDLE: Year to date, the stock is up less than the market. Two things will help move it. First is ongoing profit enhancement, through revenue growth or cost cutting.

The second is more tangible signs of improvement in the California economy. That won't occur in the next quarter or two. The economy is searching for a bottom in terms of job loss and hasn't found it yet.

We will see substantial earning growth out of this company, some this year, but especially in 1994 and 1995. My estimates are $4.85 for this year, and $5.75 for next year. Our 12-month price target is the mid $60s. [In late afternoon trading Tuesday, shares were at $45.87, down $1.25.]

Q.: PNC isn't name I hear often from analysts.

MANDLE: Our interest in PNC has two dimensions: the quality of the company and the valuation which finally got our attention. We upgraded it to "outperform" from "market perform" a month or so ago. This is a case where it is a high-quality regional bank whose share price was too depressed to ignore anymore.

Some of the selloff in their share price came at a time when we saw a run-up in New Jersey bank prices. Some of the banks that the market thought were the most likely buyers were getting hit, including PNC.

I think they are very circumspect as buyers in the recent deals. Our feeling is that the acquisitions that they've done have been additive to earnings. They are using gains from bond sales rather than external financing to finance the buy, which makes it more profitable.

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