Eight more banks, all regionals, were added to Michael Mayo's downgrade list Wednesday.
"We continue to recommend selling bank stocks for the next nine-to-12- month period given our belief that the upside potential is not worth the downside risk," the Credit Suisse First Boston bank analyst said in a report to clients.
Wednesday's stock market confirmed some of Mr. Mayo's fears. Stocks of some of the largest banks fell by more than 2%. The reasons were not clear, but some analysts attributed the decline to jitters over what Federal Reserve Chairman Alan Greenspan may say when he testifies before Congress today.
The eight banks downgraded to "hold" from "buy" by Mr. Mayo were: Centura Banks Inc., Rocky Mount, N.C.; Compass Bancshares, Birmingham, Ala.; Cullen/Frost Bankers, San Antonio; First Virginia Banks, Falls Church; Hibernia Corp., New Orleans; Northern Trust Corp., Chicago; Pacific Century Financial, Honolulu; and U.S. Trust Corp., New York.
With these latest moves, Mr. Mayo has downgraded 34 banks in 14 months. Mr. Mayo is the only analyst with a major firm to take such a negative and wholesale approach to the industry.
Other analysts are less severe in their assessments. "You have to be careful going into the second part of this year," said Nancy Bush, a banking analyst with Ryan, Beck & Co. "But now is not the time to make sweeping moves."
Mr. Mayo says among his reasons for the downgrades is that the banks lack easy future expense reductions. He also said gains in money management fees are at risk and that loan quality may be deteriorating. Also, unexpected costs as a result of year-2000 problems may develop.
According to Mr. Mayo, takeovers are the only developments that could cause a marked increase in the share price of any particular bank. But he says acquisitions are not likely in the second half of 1999 because of year-2000 concerns.
Other events, such as increases in interest rates and capital market disruptions, may hurt the banks' trust, asset-management, and brokerage operations, Mr. Mayo said.
Deteriorating assets also are a concern, Mr. Mayo said. For the industry, the quarter-to-quarter jump in problem loans was the greatest it has been in over five years, Mr. Mayo said. "For the group, problems in this category continued to increase in the second quarter.
"While not life-threatening, and still in a healthy range," the pick up in nonperforming assets could prompt analysts to lower their ratings on specific banks, he said.
"Midcap stocks are not obsolete," Mr. Mayo said. "But both large and smaller banks need to concentrate on sustainable competitive advantages."
For the day, Centura fell 0.56%, to $55.9375; Cullen/Frost 1.17%, to $26.50; Hibernia Corp. 2.83%, to $15; and Northern Trust 0.03%, to $90.875. Compass stock rose 2.99%, to $30.125; First Virginia 1.13%, to $50.5625; and Pacific Century 0.90%, to $21.0625. U.S. Trust was unchanged.
In contrast, most midcaps rose modestly. Larger bank stocks were harder hit. In addition to nervousness about what Mr. Greenspan might say, some analysts said the decline might reflect asset-quality concerns among investors.
Bank of America Corp. dropped 3.40%, to $69.3125; Citigroup Inc. 2.19% to $47.5625; and J.P. Morgan & Co. 0.84% to $132.875.
The Standard & Poor's bank index fell 1.23%, and the Dow Jones industrial average was up 0.06%. The Nasdaq bank index gained 0.50 and the S&P 500 0.16%.