The stock market's recent upheaval has placed two of the industry's closest followers of regional bank stocks at odds.
Sean J. Ryan of Bear, Stearns & Co. is trumpeting regional stocks, but William R. Katz at Merrill Lynch & Co. is urging investors to stay on the sidelines.
The "dramatic year-to-date underperformance" of midsize-bank stocks "will reverse itself," Mr. Ryan said.
"We can't go on like this," he said in a note to clients, titled "Stop the Insanity! Buy Mid-Cap Stocks!"
Though the two analysts do not follow all of the same banks, the size of their groups-from about $3 billion to about $40 billion of assets-is comparable.
To Mr. Ryan, these banks are being unfairly penalized by misperceptions that only giant institutions can survive and that hefty takeover premiums are a thing of the past.
Regional banks can thrive as long as they have solid management, and institutions that are acquired will command strong prices, Mr. Ryan said. "News of the death of takeover premiums has been greatly exaggerated."
He especially likes First Tennessee National Corp., whose shares fell 18.75 cents Friday, to $29.1825, and Summit Bancorp, which shed 50 cents, to $46.25.
First Tennessee was a forerunner in building strong fee-income operations, leveraging customer information to make more product sales, and pursuing a line-of-business structure, Mr. Ryan said.
Summit Bancorp's earnings per share should grow 11% to 13% annually for the next several years, propelled by market share gains, savings from accretive acquisitions, and a new marketing effort, Mr. Ryan said.
Not so fast, said Mr. Katz in his own report to clients, called "It Is Not Quite Time to Jump into Midcap Regional Banks."
Midsize banks are still overvalued for the most part and, contrary to Mr. Ryan's assertion, will not see hefty takeover premiums, Mr. Katz said.
Prices remain below his 20% appreciation threshold "to recommend a broad-based investment strategy."
Though the group's share prices have fallen, "I don't see what the catalyst will be for them to outperform right now," Mr. Katz said in an interview.
Prospects for big-premium acquisitions "may be waning," Mr. Katz said, and most large banks that have been doing the buying are too caught up with integration efforts to hunt for fresh targets.
Midsize banks, bid up on takeover speculation, may in fact become buyers themselves, further stunting share prices for the short term, he said.
Looking further out, Mr. Katz recommended monitoring operations with "a niche focus or decisive cost advantages."
He cited "stepped up profitability prospects" as a reason for investors to keep their eyes on First American Corp., down $1.125, to $43.40.
He also said there is long-term appeal in CCB Financial Corp., off 75 cents, to $106.50; National Commerce Bancorp, gaining 18.75 cents, to $42.5625; and SouthTrust Corp., rising 50 cents, to $41.
The action occurred on a down day for the markets as fears about second- quarter profits mixed with concerns about how long Japan's economic crisis would continue.