Nancy A. Bush of Brown Brothers, Harriman & Co. upgraded Banc One Corp. and downgraded PNC Bank Corp. on Monday, citing derivatives as a factor in both actions.
The analyst lifted her rating on Bane One to "buy" from "neutral" saying that its "unfortunate experience with derivatives" will largely run its course later this year. She lowered her rating on PNC to "neutral" from "buy," citing the "negative impact" of the bank's current off-balance-sheet positions.
Ms. Bush said she sensed "a real change in emphasis" at Banc One following a period when it stock was dragged down by investor uncertainty over its use of derivatives.
"They have come back to where they started, with a mid-western mindset and a practical outlook. They know banking is a tough business every day and that derivatives can't cover that up," Ms. Bush said.
Hits Recent Low
At the same time, the banking company's formerly high-flying stock "is at the low point of recent history on a valuation basis," she noted.
Banc One's shares are off 17.1% from a year ago, the worst performance in the market by any major regional bank. On Monday, they were up 12.5 cents to $32.75 a share in late trading.
The lagging stock price dissolved the premium to other bank stocks that that had given Banc One the flexibility to make important acqusitions without excessive cost to itself.
Earlier this year, in a dramatic sign of how much things had changed, the company was forced to abandon a deal to acquire Firstier Financial Corp. because of its moribund shares
Survived 'Traumatic Episode'
Banc One "has come through a traumatic episode in its development," said Ms. Bush, "and has emerged with both its equity and its culture intact.
"Recent experience with the derivatives portfolio, which has been severely impacted by rising interest rates, has turned this company away from 'miracles' of balance sheet management," she said. The result has been "a worthwhile reordering of the culture."
Derivatives "turned the naturally asset-sensitive position of the company" into a position of significant liability sensitivity in a climate of rising interest rates, she said. But the damage to the net interest margin should lessen over the next few quarters.
After a 63 basis-point fall in the second quarter to 5.51%, the margin may decline further to the 5.30% to 5.35% level and then stabilize. "The company is generating sufficient loan volume to offset the decline in the third quarter and net interest income should begin slowly rising," she said.
PNC 'Late Covering Positions'
PNC also entered the current period of rising rates in a liability sensitive posture. While its derivatives portfolio is much smaller than Banc One's, the bank has"been late covering positions and it is costing a lot of money," she said.
Ms. Bush cut the stock to a "neutral" rating from "buy" after lowering her 1995 earnings estimate for the Pittsburgh superregional to $3.50 a share from $3.70. Her estimate for 1994 is $3.30 a share.
The figures imply a 6% rate of earnings growth. That "will look anemic relative to much of the rest of the industry," she said.
PNC earned $3.04 a share last year. On Monday, its stock was off 37.5 cents to $28.25, which is below its yearend price of $29 a share.
The problem is both the bank's liability-sensitive posture "due to its off-balance-sheet exposure" and "the. competitive price environment in commercial lending," she said.
PNC income from its trust and investment services also does not seem as robust as usual, she noted. Trust pricing is currently weak, "due to declines in asset values."
Mortgage banking results, another strong area for the Pittsburgh company, are also a question mark because of rising rates.
Ms. Bush said her "neutral" rating did not "imply that all is bleak." Among other things, PNC is an industry leader in expense control. "This is one of the highest quality regional banks," she said.
The analyst said she hoped "the negative impact PNC is experiencing from its off-balance-sheet exposure will impact management's thinking about rate positioning in the same way Banc One has altered its taste for this type of balance sheet management."
Bancorp Hawaii Also Lowered
In another downgrade on Monday, Carole Berger of Salomon Brothers Inc. cut Bancorp Hawaii to "hold" from a "buy" rating and sliced her earnings estimate.
The analyst said the impact of rising rates "on a liability-sensitive balance sheet" as well as the sluggish Hawaiian economy are expected to make for a "difficult operating environment" for the banking company through next year.
Ms. Berger cut her 1994 earnings estimate for the Honolulu bank to $3.15 per share from $3.30 and her 1995 forecast to $3.20 from $3.75. The bank made $3.09 a share last year. Bancorp Hawaii' stock was off 87.5 cents to $32.25 in late trading.