Shares of J.P. Morgan & Co. and Bankers Trust New York Corp. led bank stocks sharply lower on Tuesday.
Lawrence Cohn, bank analyst at PaineWebber Inc., ignited the selloff in Morgan and Bankers Trust by lowering his investment ratings on the shares early Tuesday to "unattractive" from "neutral." He said he thinks earnings growth has peaked at both banks.
Bank shares in general fell Tuesday, a turnabout from the market's strong late-summer pace. The drop reflected weakness in the government bond market, the result of bad news on inflation.
Hopes for Easing Dashed
The government reported that the consumer price index rose 0.3% in August. Economists had been expecting no change in this inflation gauge.
The whiff of increasing inflation -- right after last week's surprising 0.60% decline in the producer price index -- dashes hopes for a Federal Reserve easing and makes an eventual tightening that much more likely.
Stocks and bonds slid on the economic news. The price of the Treasury's 30-year bond plunged a point and a half, raising the yield to 5.98% at 4 p.m. from 5.87% on Monday. The Dow Jones industrial average lost 18.45 points to 3,615.76.
In late trading, Bankers Trust's stock lost $2.50, or 3%, to $80. Morgan shares were down $1.50, or 1.9%, to $75.875. Shares of both banks have risen sharply in the past three months.
NationsBank, Wells Down
Other big losers on the day were NationsBank Corp., off $1.25 to $51.125; Wells Fargo & Co., off $1.75 to $118.375; and First Interstate Bancorp, off $1.25 to $63.875.
The PaineWebber analyst said the downgrades of Morgan and Bankers Trust partly reflect his less optimistic assessment of the bank stock market in general.
"After three years of [banks] outperforming the market, the time has come for investors to move from an overweighted position in bank stocks to market weight," he said.
Mr. Cohn has six "buy" recommendations and two "attractive" ratings on the 20 stocks he follows.
For Morgan and Bankers Trust, Mr. Cohn thinks earnings growth, supported in the last year by strong bond and foreign exchange trading profits, will peak this year.
Spokesmen for Morgan and Bankers Trust declined to comment.
In the first six months of this year, Morgan earned $3.59 a share, down from $5.26 in the 1992 period. Bankers Trust earned $5.66 a share, up from $3.92.
Mr. Cohn expects Morgan to earn $7.45 a share in 1993 and $6.25 a share next year and Bankers Trust to earn $10.15 a share this year and $8.75 next year.
"The trading environment is as good as it can be," he said. "But starting with a 7% long bond is different than starting with a 5.8% long bond."
Mr. Cohn said that with both Morgan and Bankers Trust trading at just under twice book value, there is limited opportunity for further advance.
"Neither has sold at these levels for very long." Mr. Cohn said.
Alison Deans, analyst for Smith Barney Shearson Inc., on Tuesday offered a more upbeat view of Bankers Trust's earnings prospects, raising her estimates for the third quarter and year.
She increased her third-quarter estimate to $2.75 from $2 and her 1993 estimate to $10.30 from $9.55.
She said the higher estimate reflects strong bond and foreign exchange trading income this quarter and fee income from record underwritings of high-yield securities offerings. She continues to rate Bankers Trust a "buy."
Other analysts remain optimistic about the two banks' abilities to generate revenue growth.
Raphael Soifer, bank analyst at Brown Brothers Harriman & Co., said that earnings for both banks have probably peaked in the short run.
But continuing growth in the derivatives business and in corporate finance in emerging markets will fuel earnings growth in future, Mr. Soifer said.