A veteran Wall Street money manager is warning that recent healthy earnings gains for banks have lulled the industry into complacency.
Most banks face an uphill battle for future earnings in the unvarnished view of Seth M. Glickenhaus, senior partner and chief investment officer at Glickenhaus & Co., New York.
As a result, "we don't see that many opportunities right now in bank stocks," he said during an interview last week in his mid-Manhattan office.
Glickenhaus, founded in 1961, manages pension/retirement, endowment, and foundation funds for clients that include Chrysler Corp., Philip Morris Co., Tenneco Inc., and Foster Wheeler Corp.
The firm has more than $2.9 billion under management. During the three years ended last Dec. 31, Glickenhaus achieved annualized returns of 24.2%.
According to CDA Investment Technologies, the firm was the top stock picker among 469 money managers surveyed for the three years ended June 30.
Over the past several years, Mr. Glickenhaus said his firm had "made a lot of money" for its clients in shares of Chase Manhattan Corp., Citicorp, and other banks as these stocks rebounded from their lows.
Chase is currently Glickenhaus' large bank stock holding. As of Sept. 9, its stake in Chase was valued at $66 million, followed by $50 million in Countrywide Credit Industries and shares of Citicorp worth $42 million.
And banks are currently posting excellent results, which has provided a floor under their stock prices, Mr. Glickenhaus said.
He believes, however, that too many bank managements fail to appreciate the degree to which their current strength stems from the huge decline in interest rates from 1991 to t993.
The Federal Reserve System's policies during that period created extraordinarily favorable operating conditions for the banks, he noted.
But from this point on, it will be a far different environment, he said: "[B]anks' margins will be deteriorating, and their earnings are going to be much harder to come by."
Meanwhile, Mr. Glickenhaus sees some warning flags.
"In too many cases," he said, "you've got banks chasing after marginal pieces of business, lending and otherwise. That's usually a sign of trouble down the road."
Mr. Glickenhaus said he also see cases of too much being paid by banks in acquisitions.
He specifically cited the deal in which New York's Chemical Banking Corp., New York, is buying Margaretten Financial Corp., Perth Amboy, N.J., a mortgage banking company, for $372 million.
That is only one of a series of recent bank acquisitions of mortgage companies. Last month, Chase Manhattan agreed to pay $348 million for American Residential Holding Corp., La Jolla, Calif.
But Mr. Glickenhaus thinks the mortgage sector will continue to be dominated by its largest player, Countrywide Credit Industries, Pasadena, Calif., of which his firm is a major shareholder.
Indeed, he thinks Countrywide Credit's management team, led by chairman David S. Loeb and vice chairman Angelo R. Mozilo, is among the best in the entire financial services sector.
"They are the low-cost provider in their business, they have a tremendous distribution network, and they make excellent use of all new technology," he said of the company. "Others have a lot to learn from them."
He anticipates Countrywide will hold 7% to 8% of the huge nationwide residential mortgage market within a few years. The company itself says it is aiming for a 10% slice of the national market.
He also feels Countrywide's leadership has passed crucial management tests this year in an environment of fast-rising interest rates and rapidly slowing mortgage lending activity.
Mr. Mozilo has complained recently about low-ball home loan rates offered by some competitors, and Mr. Glickenhaus also said he thinks some banks and other lenders are extending credit at uneconomic levels that will cause problems later.
Overall he thinks the banking industry's management has improved in the wake of its severe loan problems in the 1988-90 period. "Adversity has helped make them smarter in some important ways," he said.
"They've been a big problem, some of these bank managers. They were 'to the manner born', and they lacked the necessary toughness when the tough times arrived."
Even today, he thinks, managements at many major U.S. banks tend to be too insular, too much drawn from elite backgrounds, and most important, too satisfied with the industry's performance.
But the rise to prominence during the '80s of regional and superregional banks, which Mr. Glickenhaus still refers to as "country banks," has infused the industry with better management, he believes.
Among the big "city banks," he praised Bank of New York Co.'s chairman and chief executive, J. Carter Bacot as "first class," and said Citicorp chairman and chief executive, John S. Reed, is an "independent thinker."
Glickenhaus pursues a "value investing" strategy that aims at identifying stocks trading "below their intrinsic worth." The firm focuses on "the best relative value among securities, given the prevailing and anticipated trends within the economy and capital markets."
About two-thirds of the firm's funds under management are in equities and the rest in fixed-income securities or cash. Glickenhaus sticks to shares of domestic companies and does not engage in much "global investing."
Its typical portfolio is concentrated in a relatively small number of names, 25 to 35 equities on average, to permit close monitoring of the performance of the underlying companies by its staff of a dozen portfolio managers and analysts.