Shares of BankAmerica Corp. have been downgraded by an analyst who cited "unsettling trends" in the company's first-quarter earnings.
Edward R. Najarian of First Union Capital Markets expressed concern that BankAmerica's nonperforming assets rose 13% last quarter and that its high stock price could limit future share buybacks.
The analyst lowered his investment rating on BankAmerica to "outperform," from "buy," and removed the stock from his firm's Analyst Action List.
A BankAmerica spokesman said of the analyst's action, "We disagree with some of his conclusions and would note that other analysts do as well."
BankAmerica's shares have surged 25% this year, making them among the best-performing major bank stocks. Many analysts continue to have "buy" ratings on the shares.
Mr. Najarian granted that BankAmerica delivered strong first-quarter earnings of $1.08 per share, beating his own estimate of $1.02. But he pointed out several trends that "could negatively impact future quarters."
He noted that while the bank's chargeoff ratio was stable at just 0.58%, its nonperforming assets increased by about 13% from the previous quarter, mostly among commercial loans, to $3.2 billion. "We are concerned that higher commercial nonperformers combined with a potential economic slowdown may cause BankAmerica's commercial loan losses to increase in subsequent quarters," he wrote.
The analyst also noted that BankAmerica posted a net after-tax unrealized market loss of $400 million in its investment securities portfolio as of March 31, versus a $303 million fourth-quarter gain. That will probably "limit BankAmerica's ability to support future earnings with investment securities gains."
Mr. Najarian pointed out that the first-quarter results were helped by big trading and investment equity gains. "The ability to sustain these gains is questionable," he said.
The analyst further pointed to a slip in BankAmerica's average asset yields to 7.62% on March 31, from 8.34% last June 30. Though the company has been able to offset this by reducing yields on interest-bearing deposits, it probably cannot push funding costs much lower, he said. As a result, net interest margin pressure could build.
Finally, Mr. Najarian said, the run-up in BankAmerica's stock price may limit repurchases. He still expects the bank to unveil a program in May or June, but buying back each share will now cost more, cutting into the internal rate of return.