Stocks: PNC Lowered to 'Hold' By Analyst Who Advises Underweighting

Analyst Francis X. Suozzo of S.G. Warburg & Co. cut his investment opinion on regional bank stocks Tuesday, saying their prices may already have peaked for the year.

"Our price targets, which are based on earnings power, suggest an average 1% decline in regional bank stocks, through the remainder of 1995," he said.

The analyst reduced model portfolio ratings on regional banks he monitors to "underweight" from "market weight." He specifically cut PNC Bank Corp. to "hold" from "buy."

He said he downgraded the Pittsburgh banking company because its shares had nearly reached his $26 price target. They were off 37.5 cents to S24.625 in Tuesday's market.

It is the second time this year that Mr. Suozzo has raised a yellow flag about regional banks. He shifted to "market weight" from "overweight" on the group on Jan. 17.

The analyst currently has a "buy" rating on only one regional bank, Wachovia Corp., Winston-Salem, N.C., which he thinks "will rise in stature as asset quality increases as an investor concern."

He also has "reduce" ratings on shares of two banks, National City Corp., Cleveland, and SunTrust Banks Inc., Atlanta.

Mr. Suozzo's main concern is earnings power. He figures this by studying individual banks' lending activities, estimating normal levels of quarterly loan-loss provisions and factoring out of earnings any nonrecurring gains or losses.

The banks' normalized earnings power was flat through 1994, was likely "flat to down" in the first quarter, and probably will continue to be disappointing this year as a driver of stock performance.

"Regional banks' reported earnings growth has in recent years been fueled almost entirely by lower loan-loss provisions and reduced expenses related to foreclosed properties," he said.

But earnings power is now under growing pressure as banks' net interest margins are squeezed by higher-cost deposits and intensified loan pricing competition, Mr. Suozzo noted.

Meanwhile, he said, asset quality has shown "early signs of deteriorating," and consequent rises in loan-loss provisions "could seriously erode reported earnings growth for the group, further hampering (stock price) valuations," he said.

Mr. Suozzo said he anticipates that banks' asset quality will "deteriorate modestly in 1995 but remain well above average throughout this business cycle." At the same time, he pointed out that loan-loss provisions have also been running well below normal.

On a price basis, the analyst said, regional banks are selling on average at 10.4 times his 1995 estimate of their normal earnings power.

This is 71% of the overall stock market's price-to-earnings ratio, the analyst said, which is nearing the high end of the typical price range for bank stocks.

Mr. Suozzo said he does not expect a sharp falloff in banks' P/E ratios, but neither does he expect any further expansion during this business cycle.

Shares of Compass Bancshares, Birmingham, Ala., fell $1.125 to $25.50 as the company's management declared victory in a proxy fight against a rival slate of director nominees led by former chairman Harry B. Brock Jr.

Compass chairman and chief executive officer D. Paul Jones Jr. said the contest was "disruptive, unnecessary, and expensive, but we prevailed against a determined and well-financed adversary who tried to sell our company and failed."

Compass said the management-nominated slate of directors had received more than 55% of all shares voted in the contest.

Meanwhile, bank stocks were mostly lower Tuesday, along with the overall stock market.

Keycorp, Cleveland, was down 37.5 cents to $28.375, and rival National City was off 12.5 cents to $26.875. SunTrust was off 62.5 cents to $54.125, and Fifth Third Bancorp, Cincinnati, was down 25 cents to $51.25

Bucking the trend, the shares of Wells Fargo & Co., San Francisco, were up $1.625 to $160.25.

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