Minnesota Firm, Long Bullish, Now a Bear on Western Banks

One of the banking industry's biggest fans has lowered its projections for all the bank and thrift companies it covers.

Dain Rauscher Wessels covers companies west of the Mississippi and in Ohio, including BankAmerica Corp., KeyCorp, Washington Mutual, and more than a score of smaller ones. Their earnings growth will drop to 4.5% in the coming year, the Minneapolis investment firm said.

"It's time to review our long-standing bullish investment thesis on the group," the firm told clients this week.

"Loan growth is slowing along with most western regional economies, margins are under pressure from competition and in some cases from the flat yield curve," the firm said.

Several other investment firms have also expressed lower expectations for financial institutions. Goldman, Sachs & Co. did so Monday on thrifts.

Dain Rauscher held out the possibility of further downward revisions if troubles increase in South America, which trades heavily with U.S. businesses.

"There remains an uncertainty as to how the foreign situation will play out," said Dain Rauscher analyst Ben Crabtree in an interview.

"Will it become severe enough to cause a recession?" he mused. "There are big macro questions out there."

The firm is also concerned about the gloom that has settled over the market. "We're more worried about the psychology than we are the fundamentals," Mr. Crabtree said.

Dain Rauscher said its reassessment had to do with near-term prospects if Latin America holds up. Financial institutions should look like bargains 12 to 18 months from now, it said.

Still, the firm trimmed earnings estimates virtually across the board. The cuts include:

KeyCorp: to $2.11 per share from $2.24 this year and to $2.40 from $2.45 next year.

Mercantile Bancorp: to $2.78 from $2.80 and to $3 from $3.10.

Norwest Corp.: to $1.96 from $1.98 and to $2.18 from $2.25.

Star Banc Corp.: to $2.65 from $2.67 and to $3.05 from $3.15.

U.S. Bancorp: to $2.02 from $2.05 and to 2.33 from 2.45.

Western Bancorp: to $2.23 from $2.25 and to $2.55 from $2.65.

The firm also reduced 1999 earnings estimates for Washington Mutual, to $3.65 from $3.70, and downgraded its shares to "buy" from "strong buy."

In other downgrades, Bank-America Corp. was cut to "neutral" from "buy." The firm cited uncertainty about BankAmerica's overseas exposure, which accounts for 18% of loans. "The impact is not just losses and writedowns associated with cross-border outstandings, but the absence of profitable trading revenues going forward."

Also, the merger with NationsBank Corp. will be "an enormous integration exercise," Dain Rauscher said. "We are more confident of a relatively smooth transition, but believe investors will take a wait-and-see attitude."

In downgrading City National to "neutral" from "buy," Dain Rauscher said that though the banking company has no direct international exposure, its limited geographical diversification" would be detrimental in a regional economic slowdown.

Looking east of the Mississippi, the firm cut its rating on Fifth Third Bancorp of Cincinnati to "neutral" from "buy."

"This superbly managed bank is likely to see some growth reduction due to a weaker economy, and its conservative management might be a bit anticipatory in loan-loss provisioning," Dain Rauscher said.

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