Mark W. Kehoe, an analyst with Merrill Lynch & Co. Inc. in New York, initiated coverage last week for 14 small and midsize banking companies, mostly in California and the Midwest.
Mr. Kehoe, who joined Merrill in September from Keefe, Bruyette & Woods Inc., awarded only two "buy" ratings: one to East West Bancorp Inc. and one to Associated Banc-Corp. Both companies are working to build their loan portfolios.
In his research note, issued Thursday, he gave a "sell" rating to Greater Bay Bancorp and a "neutral" rating to the other 11 companies.
Mr. Kehoe emphasized loan growth in his assessments of the companies.
He wrote in his note that growth in Greater Bay's loan portfolio has remained slow, because of Silicon Valley's sluggish economy. The Palo Alto, Calif., company probably will have to "aggressively seek out new lending opportunities and be competitive on price," because 30% of its loan book is set to mature next year, he wrote. "This may mean it sacrifices margin for volume."
The $6.9 billion-asset Greater Bay might face "revenue strain" on its noninterest income, because of greater competition in pricing for insurance broker fees, Mr. Kehoe wrote; Greater Bay generates more than 25% of its revenue from the fees.
He expects Greater Bay to report earnings per share of $1.50 this year, the same as last year, and $1.65 next year.
However, Joseph K. Morford, an analyst at Royal Bank of Canada's RBC Capital Markets, said that Greater Bay is looking for ways to diversify its business. It has tried to increase residential mortgages and commercial loans, and it has mulled acquisitions in other markets, he said in an interview Friday.
"Their earnings have bottomed out, and we expect some modest improvement, perhaps in the second half," he said.
Mr. Kehoe has loftier expectations for what he called the "highly profitable" yet "undervalued" $6 billion-asset East West, of San Marino, Calif. He wrote that it has strong loan and deposit growth, and he put a 12-month price target of $42 on the stock.
He expects East West's earnings per share to rise 24% this year, to $1.85. Next year he expects the earnings to hit $2.20.
East West currently has 85 loan officers and said it is hiring more.
In an interview Friday, Julia Gouw, East West's chief financial officer, said that it increased its hiring efforts at the end of 2003 to capitalize on the commercial and multifamily lending opportunities in the Los Angeles market. There is no target on the number of hires, she said.
On the deposit side, East West has been particularly successful in grabbing both Chinese and mainstream commercial businesses. "It's definitely an area where we expect to grow," Ms. Gouw said.
Mr. Kehoe wrote that he gave Associated, of Green Bay, Wis., a "buy" rating because of its efforts to improve earnings growth, expand its loan portfolio, and generate more fee income. He put a 12-month price target of $37 on the shares and expects Associated to earn $2.45 a share this year and $2.70 next year.
Greater Bay did not return calls for comment. Associated said it was pleased with the rating.
Shares of East West rose 0.9% Friday, while Associated fell 0.6%, and Greater Bay fell 1.6%.
