Salomon Brothers Inc. cut its rating on CoreStates Financial Corp. to "hold" from "strong buy," citing a high share price and disappointing savings from its merger last year with Meridian Bancorp.
Shares of the Philadelphia banking company fell 1% Wednesday morning but rebounded by day's end to close at $51.875, up 12.5 cents.
Analyst Michael Plodwick downgraded CoreStates two notches as its shares soared toward his $55 price target. CoreStates shares trade at 297% of their book value of $17.40, one of the highest valuations in the industry, he pointed out.
Mr. Plodwick noted that expenses are running "stubbornly high" after CoreStates' $3.4 billion merger with Meridian. The deal closed in April 1996.
He said he had expected noninterest expense, excluding nonrecurring items, to be much lower by now than the $407.7 million reported for the fourth quarter. "In a merger, those should be coming down, but they're not," he said.
Though the analyst reduced his earnings per share estimates to $4.15, from $4.45, for 1997, he maintained that CoreStates' profitability would be "among the highest" in the banking industry, thanks in part to a 1.8% rise in loan demand.
Analyst Thomas D. McCandless of Natwest Securities Corp. strongly recommended the stock even at its current price.
"CoreStates has a unique franchise and will continue to grow," he said, noting 4% consumer loan growth year over year and a "solid" 15% growth rate in international trade financing.
Mr. McCandless said senior managers showed their confidence in the company by boosting their equity holdings, pushing insider ownership to 6.3% as of January.
Investors will eventually recognize the strengths of CoreStates as well, he said.
Separately, analyst Harold Schroeder of Keefe, Bruyette & Woods Inc. downgraded Barnett Banks Inc. to "accumulate" from "buy" and raised his price target from $52 to $54.
Barnett shares gained 37.5 cents Wednesday, to $47.875.
The analyst stressed that the downgrading was based purely on price. Mr. Schroeder said shares of the Jacksonville, Fla., banking company could rise as much as 14% and that a company must have prospects of at least 25% price appreciation to merit a "buy" rating from Keefe.
"Barnett is a great company, and it has a lot of potential," he said, noting growth trends in its home state. "But when the stock increases 21% in eight weeks and the index is up only 9%, you've got to question the valuation."
Mr. Schroeder said he likes Barnett's high-growth consumer credit products and strong asset management business. "They have a good strategy, getting in and out of lines of business," he said, pointing to its stake in HomeSide Mortgage and its purchase of Oxford Resources, a consumer credit company.
Mr. Schroeder estimated that Barnett would earn $2.30 a share in 1997 and $2.65 in 1998.
Analyst Edward Wojciechowski of Strong Capital Management, Menomonee Falls, Wis., said Barnett could attract acquirers as one of the "crown jewels" in banking.
Elsewhere on Wednesday, bank stocks mostly advanced.
The S&P Bank index gained 1.23%, to close at 513.97, while the Nasdaq index of small bank stocks rose 0.70%, to close at 1,383.9.
The Dow Jones industrial average gained 1.51%, to close at 6,961.63. The American Banker Index of 225 bank stocks, which broke the 400 threshold in trading Tuesday, continued upward to 405.1.