Financial stocks skidded Thursday, driven lower in part by comments from a Morgan Stanley, Dean Witter & Co. analyst, who reduced her investment ratings on four banking companies.

Diane Merdian's deepest ratings cut was on Milwaukee-based Firstar Corp., which she downgraded to "neutral" from "strong buy." She also cut her 2001 earnings-per-share estimate by a penny, to $1.74. Ms. Merdian said there is little upside to Firstar's stock despite the company's strong growth prospects and business operations.

Some investors may be anxious about the company's making another large deal, Ms. Merdian said in her report. Last week rumors about a possible bid for U.S. Bancorp drove down its stock (See story on page 3.) Ms. Merdian set a 12-month price target of $27, a multiple of roughly 17 times earnings based on Morgan Stanley's estimate of Firstar's 2000 earnings per share. The multiple "reflects a deserved premium to the group based on superior top- and bottom-line growth," she said in her report.

Firstar shares fell 50 cents, to $25.3125.

The jitters over the outlook for financials gained momentum when Merrill Lynch & Co. financial services analyst Judah Kraushaar warned clients that Wall Street's current expectations for Goldman Sachs Group Inc. earnings were too optimistic. After speaking with Goldman a couple of weeks ago and then again Thursday, Mr. Kraushaar said he became convinced that current Wall Street consensus estimates are "pretty lofty," given the slowdown that the securities industry has seen recently amid a jittery stock market. Goldman's shares fell $7, to $73.

In Ms. Merdian's three other downgrades - of Bank of America Corp., Wells Fargo & Co., and Citigroup Inc. - she cited recent price appreciation in the shares. She also reduced her earnings estimates for the companies and, in Bank of America's case, said the company must "demonstrate top-line growth in its huge retail business to garner a better valuation."

Retail growth has declined because income was lost from jettisoned businesses and sluggish core growth, the analyst said.

The ratings moves took Bank of America and Wells Fargo to "neutral" from "outperform" and Citigroup to "outperform" from "strong buy."

Ms. Merdian had favorable things to point out about Wells Fargo, saying its integration with Norwest has "gone well" and investors believe in the company's ability to generate good top- and bottom-line growth. "But as one of the better-positioned financial-service providers, the stock offers only modest upside to the $48 target price," she said.

She said the same was true for Citigroup, which has seen its stock rise 17% from its 52-week low of $48. "Our reduced rating is price-driven, as the stock has moved halfway to the target price since early March."

Not all the comments were negative. Ms. Merdian raised her recommendation on Comerica Inc. to "strong buy" from "buy" and Wachovia Corp. to "neutral" from "outperform."

But those stocks were unable to overcome the general pressure on financials. Comerica fell 43.75 cents to $25.125 and Wachovia dipped 93.75 cents to $48.4375, while Wells Fargo fell 56.25 cents to $43.9375, Citigroup fell $2.8125 to $58.5625, and Bank of America lost 62.5 cents to $55.3125.

Bank stocks had rallied strongly in recent sessions, but today the American Banker index of the 50 largest banks fell 2.22% and the index of 225 banks fell 2.57%.

Ms. Merdian also lowered her 2000 and 2001 estimates on U.S. Bancorp. Sluggishness in retail banking has dampened the overall growth rate, said Ms. Merdian. "Investors are awaiting evidence management can improve the overall growth rate." U.S. Bancorp's shares fell 56.25 cents to $25.125.

Dow Jones contributed to this report.

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