Rebounding Regionals Garner Wide Attention, Varying Views

Regional bank stocks bounced back with the general market last week, but analysts disagree on whether a sustained rally is in the works.

Citing continued concerns about the impacts of a flat yield curve, Merrill Lynch analyst Sandra Flannigan said share prices probably will fall.

Ms. Flannigan said she is "increasingly wary about regional banks' spread revenue prospects" and how earnings will be impacted.

But Sean Ryan, banking analyst at Bear Stearns, said third-quarter earnings reports demonstrate that regionals can continue to prosper, and he recommended buying their shares.

The comments cap a turbulent October for bank stocks, when regionals fell alongside banking companies that have a global reach.

The analysts' differing opinions suggest that volatility may resume, with investors at odds about the relative value of regional bank shares.

The Federal Reserve's two recent interest rate cuts may not be enough to stir regional banks, Ms. Flannigan said.

"Unlike prior business cycles, looser monetary policy may not be a broad-based earnings catalyst," she said.

She said regional banks that continue to depend heavily on spread income and those that are not diversifying their asset mix are most vulnerable.

First Virginia Banks Inc., Hibernia Corp., Mercantile Bancorp., and One Valley Bancorp are in this group, she said.

Of the regional banks that Ms. Flannigan follows, a 1% reduction in their spread-related income growth in 1999 would, with no offsets, would cause earnings-per-share growth to fall by an average of 1.5%.

Over all, bigger banks generally should fare better, given their "more diversified revenue streams, cost, technological and marketing advantages, and more active balance sheet and capital management," she said.

Not necessarily so, said Mr. Ryan of Bear Stearns.

He said regional banks have been forced to become more efficient and that the development can boost earnings per share growth, "regardless of external forces."

"These efficiency gains are driven by technological improvements and merger savings, both of which remain available even in a recession," Mr. Ryan said.

He also said that if further rate cuts come, they would equate to a steeper yield curve and give a "psychological" boost to investors.

As mergers among banking companies continue, investors are seeking potential for premiums, Mr. Ryan said, adding that regional banks are especially attractive targets.

The group's earnings per share is more than twice that of the Standard & Poor's 500 index, but the median bank in his group currently trades at a 65% relative multiple, based on 1999 estimates.

First Tennessee National Corp. is near the top of the list of banks he recommends.

That company's strong third-quarter results "should help dispel the misperception that the bank's business mix makes it highly rate-sensitive," Mr. Ryan said.

He also favors SunTrust, saying the company "remains a safe port in stormy waters."

SunTrust "has demonstrated its ability to grow earnings through a recession," Mr. Ryan said.

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