Some analysts have been casting about for other investment ideas among the remaining large banks in Birmingham, Ala., since Wachovia Corp. bought SouthTrust Corp. in November.
Regions Financial Corp. and AmSouth Bancorp both won positive reviews last week, despite generally lukewarm views of the prospects for small- and midcap banks this year.
In a research note Wednesday, Kathleen Bochman, a Boston analyst for the New York fixed-income research firm Gimme Credit Publications Inc., recommended buying the bonds of both companies.
Christopher Chouinard, who follows regional banks at Morgan Stanley, initiated coverage of AmSouth at “overweight,” the equivalent of a “buy” rating. He also initiated coverage of Regions, at “equal weight.”
Ms. Bochman said it could be tough for fixed-income investors to make money on bank bonds this year, because of relatively tight spreads. She has generally recommended that investors buy the higher-rated bonds of large, diversified banking companies.
In an interview Thursday, she said she had issued her “buy” recommendations for AmSouth and Regions because critical performance measures have improved at both companies.
AmSouth “hit some milestones I was looking for,” namely in capital levels and profitability, she said.
It should not suffer long-term damage from the October revelation that it had agreed to pay $50 million to settle state and federal allegations of poor compliance with money-laundering rules and the Bank Secrecy Act, Ms. Bochman said.
Instead, she expects the $50 billion-asset company to gain market share as a result of other banks’ mergers, including Wachovia’s purchase of SouthTrust.
Mr. Chouinard said that the bad news is already priced into AmSouth’s stock, and that he thinks the company’s healthy financial outlook makes the shares attractive.
“With the stock cheap relative to the group, to me it seems like something that might be under the radar for some investors, because of all the headlines about the bank,” he said.
The company’s revenue grew at a sluggish 2% annual rate between 1998 and 2003, but Mr. Chouinard expects that to rise to 7% through 2009, in part because of growth in home equity and commercial real estate lending.
Meanwhile, Regions is in the process of assimilating Union Planters Corp., the Memphis regional bank it acquired last summer. Ms. Bochman said she is encouraged by the reported progress on the integration, and that Regions appears to be “in good shape so far.”
It is improving financially, she said. Both Regions and Union Planters were less efficient and less profitable than other banks of similar size, and those continue to be issues at Regions.
One more factor in her upbeat view of Regions and AmSouth is the possibility — though still remote — that they may eventually be acquired.
The companies’ bonds have single-A ratings from Standard & Poor’s Corp., a notch below the double-A bond ratings for many larger, more diversified banks. Ms. Bochman said that expects more consolidation among regionals this year and next, and that Regions and AmSouth might sell themselves to higher-rated acquirers.
Though she said her recommendations for AmSouth and Regions are not based on takeover expectations.
AmSouth’s share rose 0.02% Friday, while Regions’ shares fell 0.09%.
