True to form, Prudential Securities analyst Michael Mayo on Thursday put sell recommendations on nine bank stocks, many of which have been the darlings of Wall Street for the past few months.
Mr. Mayo, who joined Prudential last month, initiated coverage on 19 bank stocks in all, three of them with strong buy ratings and seven of them with hold ratings. He recommended as strong buys the stocks of First Union Corp. and Bank of America Corp., saying that though the two companies have done the most to destroy shareholder value over the past two years, new chief executives both named Ken should help push prices up.
But more surprising were the stocks he told investors to dump. They include some of the best performers in the banking sector: Bank of New York Co., Mellon Financial Corp., State Street Corp., and FleetBoston Financial Group.
Sell ratings are a rarity on Wall Street, where many analysts prefer the more euphemistic hold category. But the actions by Mr. Mayo are in keeping with a new attitude at Prudential, which has been retrenching its businesses to focus more on servicing investors and has declared its intention to offer objective stock analysis untainted by the demands of in-house investment bankers. Prudential fired most of its investment bankers in November.
Hiring Mr. Mayo, who made waves in 1999 when he turned bearish on the bank sector at a time when many of his peers were optimistic, is part of Prudentials new strategy.
Steven Wharton, an analyst for Boston fund company Loomis Sayles & Co., said, Hes trying to be a contrarian. The whole thing is an attempt to differentiate himself from his peers.
Mr. Mayos maverick stance on the industry was rumored to be the reason he was dismissed from Credit Suisse First Boston last October and replaced by a team brought over from Donaldson, Lufkin & Jenrette.
Even after a four-month hiatus, Mr. Mayos bark has not quieted. After an early-morning deluge of phone calls from bank investor relations executives Thursday, Mr. Mayo said, Historically, the banks that have played hardball the most have been the ones where we have been on to something.
We have gotten some calls that were surprisingly neutral or better, and some expected angry calls, he said. I incorporate that as part of my ongoing analysis.
Mr. Mayo articulated 10 reasons why he hates bank stocks at the moment, including concerns over asset quality, the competition for deposits, and ongoing weakness in capital markets activities. He singled out the processing banks Mellon, State Street, and Bank of New York saying their volume-dependent businesses would weaken as growth in global trading volume slows thanks to the slump in the Nasdaq stock market.
Mr. Mayo also pointed generally to some gaps in perception versus reality.
Banks have relied on one-time items, such as gains on the sale of branches, securities, venture capital, and other nonpermanent items, as well as dressing up expenses via restructuring charges and asset writedowns, Mr. Mayo said in his research report. Eventually banks will have fewer rabbits to pull out of the hat with which to meet estimates.
Bankers, many speaking on background or off-the-record Thursday, begged to differ. I think its unfounded, said Eugene McQuade, chief financial officer of FleetBoston Financial, one of the few to comment publicly.
Mr. Mayo said Fleets risk was its exposure to capital markets, particularly those activities related to the beleaguered technology sector. Robertson Stephens & Co., Fleets San Francisco-based investment bank, which caters to the tech market, along with private equity activities, are expected to show a slowdown, dragging Fleets performance, Mr. Mayo said. The two units accounted for 15% of profits last year, he said.
The analyst also cited potential upheaval with the planned changing of the guard next year. Charles Gifford, president, is expected to succeed Terrence Murray as Fleets chief executive officer in January.
Mr. McQuade said it was hardly a surprise that capital markets would be weak in the first quarter, but he added that we stress diversification. He also disputed the idea that the management transition would be awkward.
Referring to Mr. Mayo, he said, Mikes trademark is to make bold strokes. Hes a gunslinger.
Bank stocks were down Thursday, but traders said the declines were not necessarily tied to Mr. Mayos recommendations.
Adam Lewis, a trader at Keefe, Bruyette & Woods, said bank stocks are wallowing in a no-mans-land, awaiting word on possible rate cuts when the Federal Reserves Open Market Committee meets later this month and earnings season next month. Its day-to-day, Mr. Lewis said of the direction of bank stocks. There seems to be very, very little conviction.
The American Banker index of 50 bank stocks rose 0.3%, and the index of 225 stocks was flat.