Salomon Brothers analysts cut ratings on three banks Wednesday on concerns that the economy may be strengthening and the Federal Reserve may be forced to raise interest rates again.
BankAmerica Corp., First Bank System Inc., and First Fidelity Bancorp. were downgraded to "hold" from "buy."
"We would sooner take profits than be purchasers at current levels," Salomon bank analysts Carole S. Berger and Jeffrey B. Naschek wrote.
They pointed out that BankAmerica's share price has soared 22.3% from its Nov. 22 low, while shares of First Bank and First Fidelity are both up 14.2% over the same period. The 50 banks in Salomon's universe have enjoyed an average price gain of 11%.
A large part of that gain was racked up in February as bank issues soared on market sentiment that the economy was slowing down and the Fed was done, or nearly done, increasing short-term rates.
But economic data released on Wednesday seemed to paint the picture of a strong economy.
February wholesale prices, measured by the producer price index, rose 0.3% overall and 1.5% excluding food and energy, the biggest jump in 14 months.
Meanwhile the Fed said the nation's factories last month were busier than they had been in 15 years. Manufacturing capacity utilization rose for the fifth straight month to 85.7%, the highest level since October 1979.
And the Salomon analysts noted that bank loan growth has re-accelerated "to mid-teen rates." They said loan demand "is apparent in every geographic area and product line, commercial and consumer."
Those robust indicators, coupled with last week's stronger-than-expected February employment report, could prod the Fed to tighten credit again when its committee of monetary policymakers meets again on March 28.
Some observers think the Fed may hold off until at least mid-April, based on a more moderate assessment of business conditions in its latest "Beige Book," also released on Wednesday.
But the Wall Street consensus until two weeks ago was that the Fed would not raise rates again until late May, if at all.
"If rates increase, the bank (stock) group in general is likely to retreat," they said. Only a clear peak in rates would make these stocks more attractive to investors, they said.
About BankAmerica specifically, the Salomon analyst said the San Francisco company "has clearly turned the earnings corner. However, we fear that growth prospects for the next 18 to 20 months are already reflected in the stock."
First Bank's shares, selling at price-to-earnings multiples of 9.6 times 1995 earnings and 8.5 times 1996 earnings according to Salomon estimates, have moved to the "upper echelon" of industry measures, they said.
At First Fidelity, first-quarter earnings may fall a few pennies a share from the previous quarter because of the acquisition of Baltimore Bancorp.
In afternoon trading, BankAmerica was unchanged at $47.75, First Bank was down 25 cents to $38.375 and First Fidelity was off 25 cents to $50.
Shares of Bankers Trust New York Corp., battered by its likely first quarter loss, got a lift from Stephen Berman of NatWest Securities Corp.
Saying the damage was mostly done, the analyst raised his rating to "hold" from "underperformer." The shares, off nearly 20% Monday and Tuesday, were up $1.25 to $51.875.