Mellon Financial Corp. and PNC Financial Services Group Inc., share a hometown, Pittsburgh, and compete in several business lines, but Tuesday on Wall Street it was hard to see past their differences.
Prudential Securities analyst Michael L. Mayo says the market had been overvaluing Mellon, which on Tuesday he upgraded to ¡§hold¡¨ from ¡§sell.¡¨ And now, he says, the market overvalues PNC, which he downgraded to an outright ¡§sell,¡¨ saying its share performance in recent months had left it overvalued.
Mr. Mayo decided that Mellon¡¦s share price had fallen sufficiently to address his concerns.
At the heart of both changes was the market¡¦s response, or lack of it, to shifting fundamentals. Most securities-processing banks have seen their stock fall since the capital markets began to tumble. Mellon, which on July 17 announced it would sell its consumer, small-business, and some of its middle-market banking operations in the Middle Atlantic states. The buyer is Citizens Financial Group Inc. of Providence, R.I., a Royal Bank of Scotland subsidiary.
While the move did eliminate slow-growing business lines, Mr. Mayo said it also reduced possibilities for cross-selling investment products to retail customers, a major goal of Mellon for its Dreyfus investment division.
Few observers on Wall Streets predict a pickup for capital markets activities anytime soon, and with the sale of its retail business lines Mellon announced that it would cut its dividend in half as of the fourth quarter, further dampening the share price. In the meantime, it was hit with the cancellation of a contract to process individual federal tax returns in the Northeast after discovering that a ¡§significant¡¨ number of tax returns had been hidden or destroyed.
Mellon stock has lost 25.87% since it last peaked June 5. On Tuesday the stock was down 1.42%, and Mr. Mayo said that should Mellon fall an additional 20% he would consider upgrading it to ¡§buy,¡¨ Prudential¡¦s top rating. Any such move up, however, would send it back to ¡§sell,¡¨ he said.
And that is where Mr. Mayo placed PNC. ¡§PNC stock is [down] only 12% from its all-time high, and close to our initiation price earlier this year, despite a 10% decline in estimates over this time,¡¨ Mr. Mayo wrote in a note to investors.
Ronald I. Mandle, an analyst with Sanford C. Bernstein & Co., also cut PNC on Tuesday, to ¡§market perform.¡¨ The stock hit had his target price of $66 on Friday.
Mr. Mandle said that the slowdown in mutual fund processing and BlackRock, PNC¡¦s asset management unit, were longer-term trends reflected in the downgrade. The company would have to achieve a more attractive combination of stock price and earnings outlook to reverse the rating change, he said.
Gerard S. Cassidy of Tucker Anthony Sutro Capital Markets said that he would stay on the sideline for both Mellon and PNC until the general market hit bottom. Mellon has the better prospects to rise then, he said, because of its higher exposure to asset management and processing.
Thomas F. Theurkauf, an analyst with Keefe, Bruyette & Woods Inc., reiterated his ¡§outperform¡¨ rating for Mellon on Tuesday. He agreed with Mr. Mayo that there is short-term pressure to the stock, but he argued that the long-term outlook for the company¡¦s performance justifies a positive rating.
PNC closed down 2.84%. The American Banker index of 225 banks rose 0.03%.n