Concerns about revenue and earnings growth prompted downgradings Thursday of two regional bank companies by a Warburg Dillon Read analyst.
Analyst Jennifer A. Thompson slashed her recommendation to "hold" from "buy" for Huntington Bancshares of Columbus, Ohio, and KeyCorp of Cleveland.
The analyst reduced her recommendation on Huntington because she expects its revenue growth to be restricted by slow growth in most of its fee business lines and by margin pressure. "Huntington posted a meaningfully better financial performance in 1999, but we are skeptical that it can sustain the momentum," Ms. Thompson said in a note to clients.
The company's dependence on spread income and its struggle to achieve strong, consistent earnings growth raise questions about its long-term fundamental outlook, she added.
Shares of the $28 billion-asset company fell 75 cents, or 3.43%, to $21.125 on a poor day for bank stocks.
Ms. Thompson said she expects KeyCorp to show good revenue and profit growth in its home equity, asset management, and high-net-worth operations. But she cut her recommendation because the company's retail banking business, which accounts for more than one-third of earnings, is likely to suffer from sluggish deposit growth, a slowdown in retail lending, and a decline in net interest margins.
The consumer finance business also will struggle with sluggish revenue growth, she said.
KeyCorp's shares fell 12.5 cents, or 0.66%, to $18.875.
One of the biggest challenges for Huntington is that it relies more than its peers do on profits from interest on its loans, said Ms. Thompson. This income is much more vulnerable to rising interest rates than is fee income.
Seventy percent of the banking company's operating revenues come from spread income, compared with 57% for the 30 largest banking companies, Ms. Thompson said. And the company's fee income does not come from high-growth businesses such as asset management, trust, or capital markets.
Huntington relies on deposit-account fees. Its mortgage banking business is also suffering because of a slowdown in originations.
"Management is addressing this," said Ms. Thompson "But we believe its target of achieving 50% of total revenues from fee business will put near-term pressure on earnings in the form of investment spending."
The company also faces heavy competition from such large in-state rivals as Bank One Corp., National City Corp., KeyCorp, Firstar Corp., and Fifth Third Bancorp.
Huntington has cut costs and repurchased shares to increase its earnings-per-share growth, but these are only short-term measures, said Ms. Thompson. "We feel it will get progressively harder for Huntington to wring out cost savings to pump EPS growth," she wrote.
Ms. Thompson estimated that Huntington's earnings per share growth would be 7.1% annually this year and next. Earnings per share at other regional banks are expected to grow 10%, the analyst said.
She said that she is redirecting her clients into Wells Fargo & Co., which has already won strong praise from many analysts on Wall Street. The company is in an attractive geographical market, she said, has a leading Internet position, and offers attractive products. She upgraded the stock to "strong buy" from "buy.
Wells' shares fell 25 cents, or 0.63%, to $39.1875. The American Banker index of the 50 largest banks fell 1.54%, and its index of 225 banks fell 1.07%.
