Wachovia Corp. shares advanced Thursday after they were upgraded to "buy" from "hold" by UBS Securities Corp.
"We are reorienting ourselves toward quality banks that have been able to spend the last few years focusing on products and customers instead of cost cutting and survival," UBS banking analyst Brent B. Erensel said.
Wachovia, based in Winston-Salem, N.C., was ahead 87.5 cents to $35.25 in late trading. Mr. Erensel thinks it can hit $45 within 12 months.
The southeastern super-regional is highly regarded for its conservative credit culture. That has insulated Wachovia from the loan problems that plagued other banks over the past several years.
Eye on Revenue Growth
On. June 30, Wachovia's bad loans amounted to just 1.04% of loans and foreclosed real estate, while loss reserve coverage equaled 223% of nonperformers.
"The world seems to be focusing on cyclical factors like trading gains, securities gains, and declines in credit costs," he said. "It seems better to focus on revenue growth in this decade."
He said the battle among banks for revenue will intensify in 1994 and 1995 after the factors now driving stocks have faded - especially if the economy remains sluggish.
"The best bank stock performance has come from banks that have dropped their loan-loss provisions," Mr. Erensel noted. "But the market in the end only pays so much for that. It is only sustained revenue growth that leads to the higher [price-to-earnings] multiples," he said.
Wachovia, he said, is enjoying 7% annualized loan growth and 12%, growth in fee income. Meanwhile, expenses are rising only 3%.
Wachovia has capitalized on the misfortunes of the industry, he noted. Offering credit cards with lower interest rates ahead of competitors, for example, has spurred a 50% growth rate in its card business, he said.
Debit Card Effort
It also has a major debit card business as a result of its acquisition two years ago of South Carolina National Corp., he said.
Debit cards may be the next wave in banking, much like automated teller machines," he said. "Twenty years ago, a lot of bank customers couldn't or wouldn't use ATMs, but now they can't live without them.
"The same thing may very well be true of debit and Wachovia already has a strong running start in this area of business," Mr. Erensel said.
Wachovia has a high rate of profitability. It had annualized returns of 1.51% on assets and 17.3% on equity as of June 30.
Mr. Erensel said he also felt Wachovia has demonstrated a highly disciplined acquisition strategy.
"They believe they have economies of scale at their current. size," he said and resist deal-making for purposes of growth alone. Wachovia had assets of $32.7 billion on June 30.