Shares of superregional banks were downgraded Monday as analysts expressed renewed concern that the group will have a hard time increasing revenues.
Michael L. Mayo of Prudential Equity Group LLC cut National City Corp., U.S. Bancorp, and PNC Financial Services Group Inc. all to "underweight" from "neutral weight," and Terry J. McEvoy of Oppenheimer & Co. downgraded KeyCorp shares to "sell" from "neutral." Analysts love to hate the stock, though it has performed well in recent months.
Henry Meyer, Key's chairman and chief executive, was upbeat about commercial loan growth last month when the $85.3 billion-asset Cleveland company reported third-quarter earnings.
But Mr. McEvoy attributes the stock's recent rise to better asset quality. That allowed Key to reduce its quarterly provision for loan losses and in turn boost earnings, he said.
In his research note, Mr. McEvoy said investors could dump Key shares when they become dissatisfied with its organic growth. "While we agree that Key's reserves were above what appears to be needed, the quality of earnings has been below most of its peers," he wrote.
Mr. Mayo said he is tilting a bit away from regional banks. Unlike bigger banks, the three he downgraded Monday derive little of their earnings from capital markets businesses, so they would not benefit from a market upturn, he wrote.
Those three and Atlanta's SunTrust Banks Inc., another that Mr. Mayo rates "underweight," are trading at higher prices than in the past, he wrote.
National City continues to battle a slowdown in its mortgage business, and its gains from hedging in recent quarters will probably dry up soon, Mr. Mayo wrote. He noted that the $136.4 billion-asset Cleveland company gets only 4% of earnings from asset management, a business that has not performed well. "We anticipate a messy fourth quarter," he wrote.
PNC has more exposure to the capital markets business, but Mr. Mayo said BlackRock Inc., which is mostly owned by the $77.3 billion-asset PNC, may suffer from a decline in the fixed-income business caused by rising interest rates. And PNC Advisors, the Pittsburgh company's more equity-focused wealth management unit, "has not performed well," Mr. Mayo said.
He further wrote that PNC could add risk if it goes ahead with its deal to buy the troubled Riggs National Corp. of Washington, though some on Wall Street say PNC may call off the deal, which was announced in July and is to close in the second quarter.
Mr. Mayo wrote that acquiring Riggs would give PNC management an integration project at a time when competition from larger banking companies is heating up.
As for U.S. Bancorp, Mr. Mayo noted that the $192.8 billion-asset Minneapolis company "had weaker than average" third-quarter results, continuing a trend that has lasted several quarters.
"We do see upside to the firm's revenue base in an expanding economy, but we do not see any reason for relative outperformance compared to other large banks," he wrote.
U.S. Bancorp fell 0.4% Monday. PNC fell 1.8%, National City fell 0.26%, and KeyCorp fell 0.8%.
