Citigroup Inc.'s Smith Barney introduced a ratings system Monday that resulted in upgrades for five regional banking companies and a downgrade for one.
Analyst Keith Horowitz upgraded shares of M&T Bank Corp. of Buffalo and First Tennessee National Corp. in Memphis to "buy," the new top rating, from "in-line" (equivalent to the new "hold").
Shares of Amsouth Bancorp. of Birmingham, Ala.; BB&T Corp. of Winston-Salem, N.C; and Union Planters Corp. of Memphis were upgraded to "hold" from "underperform" (now known as "sell").
Sovereign Bancorp. Inc. of Philadelphia was downgraded to "hold" from "outperform," the former top rating.
William R. Kennedy Jr., Smith Barney's director of research, said in a letter to investors that the changes were "based on client feedback and a desire for more simplicity and transparency."
This is the second time in a year that Citi's brokerage has revised the system. Last September the unit, then named Salomon Smith Barney, went to three ratings from five after New York Attorney General Eliot Spitzer's investigation into Wall Street research practices. Ten firms eventually reached a $1.4 billion global settlement with Mr. Spitzer and other regulators.
Smith Barney's latest changes eliminate sector ratings. Also, ratings are based only on a company's performance, rather than on how it performs in relation to others.
Steven Wharton, a buy-side analyst with Loomis, Sayles & Co. of Boston, said that move appears to be geared toward Smith Barney's retail investors. He speculated that they found the old system, particularly in combination with the sector ratings, confusing.
All major brokerage companies have altered their ratings since Mr. Spitzer's focus on research, and some, like Smith Barney, have overhauled them again.
Last week Prudential Equity Group changed its system but went in the other direction: It now rates stocks "overweight," "underweight," and "neutral weight," instead of "buy," "hold," and "sell." It said it wanted to be in sync with "recently instituted moves by brokerage firms that have led to a now-common Street practice of rating" stocks. Prudential continues to rate sectors.
Smith Barney's changes did not prompt any new ratings for large-cap banking companies. But for Sovereign, the new system, in combination with a run-up in its share price this year, led to the downgrade. The run-up is attributed in part to speculation about merger and acquisition activity in the Northeast, but like many analysts, Mr. Horowitz said a takeover looks unlikely in the near term.
M&T's acquisition of Allfirst Financial Inc. of Baltimore from Allied Irish Banks PLC in April "should provide fuel for several years," he said.
On Monday, Sovereign fell 0.5%, while M&T rose 1.4%.
Meanwhile, Michael K. Diana, who follows small-cap banking companies for Smith Barney, upgraded Silicon Valley Bancshares to "hold" from the old "underperform." Charlotte A Chamberlain of Jefferies & Co. Inc. upgraded Silicon Valley's stock to "buy" from "hold." The Santa Clara, Calif., company increased its third-quarter earnings guidance on Friday, and on Monday its shares rose 7.3%.
