Smith Barney analyst Henry C. Dickson downgraded Keycorp on Wednesday, citing the mid-western superregional's declining net interest margin,
In a conference call to analysts earlier in the week, bank officials reported that the net interest margin declined to 4.79% from 4.92% in the second quarter.
On Wednesday, Keycorp stock fell 37.5 cents to close at $27.75 during a lackluster day for bank shares and the market in general.
The 13-basis-point decline in the net interest margin persuaded Mr. Dickson to downgrade the company to "neutral" from "buy" despite strong loan growth.
Keycorp's "liability-sensitive balance sheet position and industry pricing pressures have impacted the net interest margin and, we believe, further limit the company's earnings potential in a rising-interest-rate environment," he said.
Concern about future earnings growth and market perceptions of the industry were also factors in the downgrade, he said. "While we continue to believe Keycorp will earn $4 [per share] in 1995, we believe earnings growth will be more dependent on lower loan-loss provisioning than-initially expected."
Like other banks with liabilities that reprice faster than assets, Keycorp has seen its net interest margins narrow after enjoying healthy spreads in past years.
Mr. Dickson attributed 12 basis points of the decline to earning assets growth amid competitive pricing.
Also, Keycorp lost 2 basis points to earning assets replacement and 3 basis points to the company's liability-sensitive balance sheet, he said.
The company gained 4 basis points because of a lag in deposit pricing, he added.
Mr. Dickson did not revise his 1995 earnings-per-share estimate, partly because he expects the loan-loss provision to be a source of earnings by next year. Reserve levels are strong, and net chargeoff levels should remain low, he said.
Fee income growth, which Keycorp has said it would like to almost double to nearly half of all revenues, was relatively weak in the third quarter, as it was around the industry.
The company has said it may want to sell its mortgage business. Analysts speculate that Keycorp would use the proceeds to buy an asset management company.
Finally, Keycorp's merger with Society Corp. should be a source of earnings in 1995, Mr. Dickson predicted.
James H. Weber, an analyst with A.G. Edwards & Sons Inc. in St. Louis, dismissed concerns about Keycorp's net interest margins.
While agreeing that margins had tightened, Mr. Edwards, who has a "buy" rating on the stock, said most of the decline had taken place and the trend would soon change.
"I see the potential for sizable appreciation over the next 12 to 18 months as interest rate worries flow through the system," he said. "Eventually, the market is going to stop worrying about interest rates."
He argued that much of the margin pressure is already reflected in Keycorp's stock, which is trading at a mere seven times 1995 estimated earnings.
With a strong capital position and excellent loan growth, Keycorp should be poised for healthy gains, he said.
The big market mover of the day was U.S. Trust Corp., which soared $4.375 to close at an all-time high of $58.875 after reports that Chase Manhattan Corp. would pay $350 million for its securities processing unit.
U.S. Trust announced earlier this week it had entered discussions to sell its operations that process mutual funds, unit trusts, and institutional custody. The sale would not include its higher-yielding asset management business.
Reports that the processing business produce annual revenues of $100 million may be too low, said Denis Laplante, an analyst with Fox-Pitt Kelton, who issued a research report on U.S. Trust in June.
Including net interest income from these businesses, the revenues are roughly $150 million Mr. Laplante said.
Chase Manhattan, which would not comment, finished the day unchanged at $34.75.
