Raising the latest yellow flag over the financial sector, Goldman, Sachs & Co. on Wednesday cut its expectations for the thrift industry, saying low interest rates would halt its string of double-digit revenue gains.
Earnings-per-share growth for thrifts will likely slip next year by one- third as asset growth and net interest margins flatten, analysts Michael Hodes and Robert Hottensen said in a note to clients.
The sober assessment reflects the wide range of effects on thrifts as rates remain low and demand continues to shrink for their bread-and-butter business line-adjustable-rate mortgages.
Goldman's reconsideration, which trimmed earnings estimates for the group by an average of 5%, prompted a removal of Washington Mutual Inc. from the firm's list of recommended stocks and ratings downgradings for several other thrifts.
"We are continuing to have pressure and will probably see a little worsening next year," Mr. Hodes said in an interview. "It only makes sense to be more neutral on the group."
The view mostly reflects continued fallout from a flattened Treasury yield curve that makes the cost of money for thrifts virtually equal to the price at which they lend it. As a result, it is difficult to profit from mortgage operations, both making and servicing loans.
On top of that, there are growing expectations for a general softening in the economy.
Mr. Hodes conceded his appraisal would not likely drive down thrift stocks much further after the thrashing they have endured over the last several months.
Indeed, thrifts jumped along with broader markets on Wednesday on renewed hope that the Federal Reserve Board would reduce interest rates at its policy meeting next week. The market was reacting to comments about a slowing economy by Fed Chairman Alan Greenspan before the Senate Budget Committee.
The Standard & Poor's bank index climbed 5.75% and the Dow Jones industrial average added 3.26%. The Nasdaq bank index added 2.08% and the S&P 500 gained 3.54%.
While thrifts showed some strength, Mr. Hodes said he still leans toward continued restraint in stock purchases. But other analysts have begun recommending a cautious return.
"The severe underperformance of thrift stocks is unwarranted," maintained Chad Yonker, industry analyst at Fox-Pitt, Kelton Inc. "Significant value has been created."
Thrifts have little if any exposure to problems overseas or in capital markets and are "tremendously leveraged for declining short-term rates," Mr. Yonker said.
His recommendations include Charter One Financial, up 62.5 cents to $25.125 on Wednesday; Dime Bancorp, which also gained 62.5 cents, to $26.50; and on continued faith in its management, Washington Mutual, which added $2.0625 to $35.5625.
"Environmental factors could be shifting in favor of thrifts," asserted Thomas Theurkauf, analyst at Keefe, Bruyette & Woods.
While the current yield curve is flat, the forward curve indicates some easing by the Fed over the next year, Mr. Theurkauf said.
That easing, combined with the anticipation of stable long-term rates, would result in a more normal, positive yield curve that should help thrifts, he said.