Shares of SouthTrust Corp. fell Monday after the company was downgraded by a J.P. Morgan analyst, and Sovereign Bancorps dropped despite bullish remarks by a Sandler ONeill & Partners analyst.
Michael L. Granger of J.P. Morgan cut SouthTrust to market perform from buy, citing a slowdown in the Birmingham, Ala., regional banking companys net interest income. On Wednesday, SouthTrust reported that its third-quarter net interest income had dropped 12% from the year earlier. Its per-share earnings rose 16.1%, to 72 cents. 
In his research note, Mr. Granger wrote that SouthTrust, which he said should earn $2.85 per share this year, will enter 2001 with a substantially reduced revenue base.
Even if it is able to stabilize the net interest income situation and begin to grow it again, estimates will have to come down. He reduced his estimate for next years per-share earnings by 19 cents, to $2.96.
We expect fee income growth to be strong, at around 11%, but because net interest income makes up about 75% of SouthTrusts total revenue, slow growth in net interest income will dominate the total revenue growth, he wrote.
Christopher T. Kelley of Morgan Keegan & Co. said SouthTrusts margins were tight but they stayed out of trouble in terms of credit quality.
He said the companys numbers were in line with his expectations and called it one of the best middle-market commercial lenders in that part of the country.
SouthTrusts margins will improve since the Federal Reserves interest rate hikes have stopped, Mr. Kelley said, and the stock remains undervalued. He kept the companys rating at outperform.
Payton N. Green, an analyst at Sterne, Agee & Leach, said that his lukewarm accumulate rating reflects his overall impression of the peer group. SouthTrust can grow internally, he added.
On a sluggish day for financial stocks, SouthTrust was down 46.75 cents Monday, or 1.46% to close at $29.50.
Meanwhile, John Kline, a managing director of research at Sandler ONeill, wrote that his top-grade buy rating for Sovereign reflects the Wyomissing, Pa., banking companys improved balance-sheet fundamentals and its compelling stock valuation. Though the company surely has a long way to go on the capital front, we think the stock is being excessively penalized, he said.
Sovereign started falling along with most financial stocks, from $9.46875 on Oct. 5, and has yet to recover fully. On Monday it fell 6.25 cents, or 0.83%, to $7.4375.
Sovereign lost 7 cents per share in the third quarter because of a number of one-time charges, but Mr. Kline wrote that this should be the last quarter where mental acrobatics will be required to arrive at an operating EPS figure and that the company had a pretty solid third quarter.
Excluding the charges, the banking companys earnings rose 32% from a year earlier, to 33 cents per share. Nevertheless, Mr. Kline reduced his per-share earnings estimate for next year by 5 cents, to $1.30.
David H. Winton of Keefe, Bruyette & Woods Inc. also reduced his earnings estimate for next year by 13 cents, to $1.27. He wrote in a research note that Sovereigns 5.9 price-to-earnings ratio justifies an outperform rating.
