Stocks: Wachovia Upgraded by Contrarian on Rates

An analyst's upgrade of Wachovia Corp. demonstrated a shift away from the conventional wisdom about bank stocks.

Richard X. Bove of Raymond James & Associates raised his rating on the Winston-Salem, N.C.-based banking company last Friday to "accumulate" from "neutral." But his reasoning was exactly opposite to the traditional view, that falling interest rates are good for banks.

Bank stocks in general have soared recently, along with the bond market, amid signs of a weaker economy and lower rates.

Mr. Bove characterized his boost to Wachovia's rating as "defensive," arguing that falling rates would hurt most banks.

"If your view of the economy is 'relatively weak' to 'sliding into recession,' and you want to benefit from the decline in interest rates, there are certain banks that stand out from the others, and Wachovia is one," the analyst said.

Wachovia has a wholesale funding strategy that distinguishes it from the majority of banks that rely on core deposits. Mr. Bove reasons that when rates fall, most banks will see their profit margins shrink, because their loan yields will fall faster than already-low deposit rates.

"I think based on the way we see the world spinning over the next couple years (Wachovia) is preparing itself to be well structured, defensively," he said.

Mr. Bove said Wachovia is better prepared than most banks for an economic downturn because of its conservative approach to lending.

"Unlike other banks that are building assets, and making riskier loans, Wachovia has slowed down the growth of its balance sheet," Mr. Bove said.

"In areas like credit cards Wachovia has actually backed off, and unlike some banks, is not trying to issue a card to every last 13-year-old, he said.

"Wachovia has a reputation for strict underwriting, and is likely to do better than the industry over the next few years," Mr. Bove said.

In trading Friday, Wachovia shares rose 12.5 cents to $46.625.

Mr. Bove maintained his earnings projection of $3.45 per share this year and $3.70 next year.

Separately, analyst Henry C. Dickson, of Smith Barney, resumed coverage of PNC Bank Corp. with an 2-M, or "outperform" rating.

Smith Barney had been restricted from commenting on PNC as its adviser in its recently completed acquisition of Midlantic Corp.

The new rating represents an upgrade over the Smith Barney's previous 3- M, or "neutral" rating.

Mr. Dickson said he believes the merger will help PNC increase its earnings by giving it more reliance on loans, deposits, and fee income, and reducing dependence on securities investments.

He lifted his 1996 earnings estimate for PNC to $3 per share, from $2.80, and maintained his 1997 estimate of $3.40 per share.

Mr. Dickson set a 12-month target for the stock of $35 a share. PNC shares finished the day at $30, up 12.5 cents.

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