Mellon's Shares a Value, Some Analysts Say

Because of lingering skepticism about asset quality, Mellon Bank Corp. has been a laggard during this year's rally in bank stocks. But at least a few analysts now see an opportunity to buy undervalued shares.

"My sense is that after two or three quarters of very good results, the stock will start moving," said Livia Asher at Merrill Lynch & Co., who began recommending the stock in mid-April. Last Thursday, she raised her 1991 and 1992 earnings estimates for Mellon to $4.35 and $4.50 a share from $3.70 and $4.

Her target range for Mellon's stock price is $40 a share within the next 12 to 18 months. The stock closed at $31.625 a share.

Discount to Book Value

Although the stock has moved up steadily this year, Mellon still trades at a discount to an adjusted book value of $34 a share, Ms. Asher says.

Mellon's reported book value is $30 a share. The adjusted figure reflects Ms. Asher's assumptions about the bank's hidden credit losses and the present value of future tax benefits.

In contrast to Mellon, most other regional bank stocks that Ms. Asher follows are selling at premiums of 30% to 50% to adjusted book value.

The main reason why Mellon still trades at a discount, analysts say, is that the market isn't fully convinced that the bank's credit woes are behind it.

Bad Loans Spun Off

In 1988, Mellon spun off its sour energy and real estate loans to Grant Street Bank, its so-called bad-bank subsidiary. That move was followed by several quarters of improving asset quality at Mellon, but a further erosion in commercial real estate caught up with Mellon again.

Investors were taken aback earlier this year when Mellon reported an unexpected fourth-quarter 1990 loss because of problem real estate loans.

As a result, "the market has been a bit skeptical about Mellon," says Thaddeus Paluszek at Kidder, Peabody & Co., who has recommended the stock for several years.

In order to turn investors around, Mellon has to show a pattern of relatively stable asset quality and a positive earnings performance, Mr. Paluszek said.

Despite the fourth-quarter flare-up, Ms. Asher thinks Mellon has largely resolved its real estate loan problems, and doesn't expect any further reserving.

Also, Mellon's portfolio of loans classified as highly leveraged transactions, or HLTs, is "fairly clean," she said.

Still, Mellon's overall ratio of nonperforming assets was a relatively high 4.3% at the end of the first quarter.

The average for the other regional banks followed by Ms. Asher was 3.7%. [Graph Omitted]

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