Impact of Rising Rates Cited

The recent flurry of bank downgrades continued Thursday as two Wall Street analysts simultaneously set their sights on Huntington Bancshares.

Lehman Brothers' Mike Mayo sliced his rating to "hold" from "outperform." Smith Barney's Henry C. Dickson lowered Hunlington shares to "neutral medium risk" from "outperform medium risk."

Both cited the impact of rising interest rates on a bank that is liability-sensitive.

Huntington fell 6%, or $1.125, to close at $18.875. Trading was heavy, with more than 1.1 million shares changing' hands, 664% of the average daily volume.

"There are some external factors right now that management can not overcome in the short term," said Mr. Mayo. "Higher interest rates [and] competition on auto loans and mortgage banking" will contribute to weaker than expected earnings in the third quarter.

Mr. Mayo estimated the bank's third quarter earnings would fall 5 cents from the last quarter to 47 cents, and for the year he estimated earnings would be $2. The consensus among analysts is that Huntington will earn $2.10.

Mr. Dickson also predicted earnings per share would drop to 47 cents in the third quarter. He blamed slower than anticipated mortgage banking activity.

But he joined Mr. Mayo in noting the effect of rising interest rates on the the bank's profitability.

"The net interest margin appears to be declining as expected, but at a greater rate than we had forecasted," Mr. Dickson said in his investor report. "We believe the margin will be 5%, or less in [the third quarter] and for the year, after averaging 5.2% for the first half of 1994." Mr. Mayo is even more pessimistic, estimating the margin will fall to 4.5%.

Another analyst, who requested anonymity, said these concerns were hardly new, and the bank itself had been broadcasting these problems to analysts for some time.

"These are issues that are not new to the company this quarter," said the analyst, who is optimistic about the stock. "How dramatic an impact it has on the company this quarter may be different."

The downgrades of Huntington were the latest in a series of pessimistic reviews to beset the industry.

Last week Dean Wittier Reynolds' Anthony R. Davis downgraded Central Fidelity Banks, Crestar Financial Corp., Barnett Banks Inc., and Integra Financial Corp.

And the week before, Salomon Brothers' Carole Berger downgraded AmSouth Bancorp., Boatmen's Bancshares, NationsBank Corp., Norwest Corp., Bankers Trust New York Corp., and Republic New York Corp.

She said she was not negative on the bank industry; but warned that bank stocks were peaking.

Similarly, Mr. Mayo said Huntington remains a strong company, but its stock price is too high because of takeover speculation.

Mr. Mayo replaced Huntington on his "buy" list with CoreStates Financial Corp., which has not enjoyed the surge other stocks have because of its pricey acquisitions.

Those purchases have diluted its earnings per share an estimated 5%, Mr. Mayo said. But the market has overreacted to the acquisitions, and failed to give the bank its due for cost-cutting moves that have included the recent shedding of eight directors, he said. CoreStates is now one of his top two picks.

Given its key position in the Philadelphia market, CoreStates should reach $36 within 12 months, he said, a 29% increase.

Mr. Mayo said he was still high on Huntington, but that tremendous competition in the indirect auto lending business, which contributes roughly onefourth of its revenues, had eroded earnings.

Other banks and the financing arms of the Big Three auto makers had kept a lid on pricing, squeezing the difference between auto loans and funding cost to less than 100 basis points, he said.

Bank stocks moved little Thursday, as the Dow Jones Industrial Average closed down 15.14 points at 3818.92.

Mercantile Bancorp, St. Louis, closed at $36, down $1.75 after announcing it would purchase Central Mortgage Bancshares.

First Interstate Bancorp finished up $1 after the Federal Reserve Board approved its proposed acquisition of Sacramento Savings Bank and Central Valley Security Co. The closing price was $83, just $2 off the year high.

CoreStates finished the day up 25 cents at $27.875.

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