A slew of upgrades and downgrades have sent shares of trust and processing banks on a wild ride this week.
Brock Vandervliet, an analyst with Lehman Brothers, said that shares of State Street Corp., Bank of New York Co., Mellon Financial Corp., and Northern Trust Corp. have become more popular with bank investors recently as they look to reduce their exposure to traditional, spread-driven retail banks.
While the decline in consumer-related businesses has hurt traditional retail banks, a rebound in the equity markets in recent months has made investors take another look at trust and processing banks.
"Traditional banks have outperformed for the last four years, and many are concerned whether that performance can continue," particular with specter of higher interest rates, Mr. Vandervliet said. "And the stock market is doing quite nicely, so there's been more interest in bank names or brokers that have the capital markets exposure."
Analysts are optimistic about the sector in general, but they disagree about the prospects of individual companies, particularly in relation to their stock prices.
On Monday, Bank of New York and State Street, of Boston, shot up 4.2%, in part because of upgrades by Swiss Reinsurance Co.'s Fox-Pitt, Kelton Inc. Both continued to climb Tuesday, with State Street rising another 1.3% and Bank of New York gaining 1.5%. Mellon, of Pittsburgh, which Bear Stearns Cos. named a top pick, rose 2.5% Monday and 1.9% Tuesday.
Yet all three stocks fell back Wednesday. Bank of New York dropped 3.5%, Mellon 1.9% and State Street 1.36%.
Highlighting the differing opinions, two days after Fox-Pitt Kelton's upgrade, Prudential Equity Group Inc. downgraded Bank of New York to "underweight" from "neutral weight."
"The environment is not as good as implied by the recent increase in the stock price," Mike Mayo, a Prudential analyst, wrote in a research note.
Yet Thomas McCandless, an analyst with Deutsche Bank AG, said that Bank of New York "continues to be our favorite stock in the group" and cautioned against the other banks. He currently has neutral ratings on Mellon and Northern Trust and a "sell" on State Street.
"This is the right kind of market to be involved with all of these stocks," he said. "But we're always trying to balance value versus growth."
Mr. Mayo on Wednesday initiated coverage of Northern Trust with an "overweight" rating. Shares of the Chicago banking company rose 1.3% Wednesday after increases of 2.2% Monday and 1% Tuesday.
Northern Trust is "uniquely positioned in the 'sweet spot' of the financial services industry," he wrote in a research note. "Relative to other processing banks, Northern has had superior growth, more consistent performance, less reliance on acquisitions, and a greater focus on businesses it knows."
Yet Mr. Vandervliet argued that the prices of State Street and Northern Trust shares are getting close to their historical highs. "We would favor Mellon, where you have the catalyst of a turnaround in their largest line of business, HR services, or in Bank of New York, where the valuation is significantly more attractive than State Street or Northern Trust," he said.
On Thursday shares of the four companies had a mixed session. Mellon rose 1.34% and State Street rose 0.6% while shares of Bank of New York slid 0.1% and Northern Trust fell 0.3%.
