For the second time this week, a major Wall Street firm has sounded alarms about the prospects of the banking industry.
Goldman, Sachs & Co., among Wall Street's leading bulls for five years, lowered its overall investment opinion of the industry. The move prompted a sharp selloff and may mark a turning point for bank stocks, which were soaring.
Goldman's action came just two days after a similar report by analysts at Merrill, Lynch & Co.
The Standard & Poor's bank stock index fell 3.01% Thursday, while the overall S&P 500 index dropped only 0.58%.
"Last year was outrageously good for all the banks. We think that performance was driven by loan growth, which is now definitely decelerating," Robert B. Albertson, Goldman's director of U.S. bank research and a money-center analyst, said Wednesday.
In a report, the Goldman bank analysts said they were lowering their suggested portfolio weighting of the bank sector to "market weight" from "moderate overweight." They cited the banks' "strong 1995 price performance, despite a weakening economy."
"There is a point where a slowing economy stops being good for banks and starts affecting them fundamentally," said Sally Pope Davis, Goldman's top regional bank analyst. "We think that point may be near."
Goldman's analysts first signaled last summer that they believed a transition point in the credit cycle was near when they sliced their industry group rating to moderate overweight from "strong overweight."
In addition to the group rating change, Goldman issued price-based downgrades of six superregional banks: NationsBank Corp., Mellon Bank Corp., Comerica Inc., First Chicago NBD Corp., Star Banc Corp., and Wachovia Corp.
The Goldman analysts primarily focus on the lending cycle as the key to their overall view of the industry. They assess this cycle as consisting of four stages.
First, the decline toward the culmination of loan losses, which most recently occurred in 1990; second, a recovery in credit quality; third, renewed loan growth; and fourth, a loan demand slowdown amid price competition.
The second and third stages are the "rising-tide-that-lifts-all boats" part of the cycle, the analysts said. The huge bank rally in 1995 was likely the climax of the third stage, Mr. Albertson noted.
"Last year, 88% of bank stocks outperformed the Standard & Poor's 500," he said. "There were dartboard aspects to it."
The big price gains last year were also buttressed by a surge in merger and acquisition activity, the analysts noted. Now, however, banks are entering the more ambiguous fourth stage of the cycle.
"The most important top-line revenue item, net interest income, is under increasing pressure as the loan demand cycle continues to decelerate to very low single-digit growth," the Goldman analysts said.
"Over the last three months, loan demand can even be described as plummeting," they said. Both consumer and business seem past peak points.
But the analysts emphasized that they do not expect major credit problems for banks, and they do not expect bank stocks to do worse than the stock market overall.
Indeed, some banks may continue to outperform. Goldman's top picks in the industry are Citicorp, Banc One Corp., Norwest Corp., BankAmerica, and NationsBank.
Still, the report triggered some aggressive selling Thursday.
"The more liquid firms are getting hit hard and things are looking pretty bad. Combined with the Washington news and the negative consumer debt reports, (the Goldman report) create a selloff with the banks," said Michael Stead, a fund manager at SIFE Trust Fund in Walnut Creek, Calif.
Goldman technically lowered its view of NationsBank, but still has a buy rating on its shares.
The bank was shifted to the firm's "U.S. Recommended List" of stocks from its more exclusive "U.S. Priority List." The analysts still believe its share price could rise 20% this year.
The only banking company still on the firm-wide priority list is Citicorp.
Mellon, whose shares rose 71% in value last year, was dropped from the recommended list. It is now rated "moderate outperformer."
Comerica, First Chicago NBD, Star Banc, and Wachovia were reduced to "market performers" from "moderate outperformers."