Wall St. Takes a Shine To Sovereign Bancorp

While most thrifts crippled themselves with misguided loans, Sovereign Bancorp followed a strategy that today is winning fans on Wall Street.

Sovereign, a $1.45 billion-asset thrift, is a scaled-down version of Golden West Financial Corp., the California thrift that has had success focusing on low-risk, single-family mortgages.

Sovereign "didn't get away from deposit taking and mortgage writing," said Lloyd Widom, an analyst with Prudential Securities. "Golden West is much larger, but it is doing well for the same reason."

Mr. Widom put the stock on his "buy" list recently. He expects Sovereign's stock price to jump about 40% over the next 12 to 18 months, to $14 a share.

A Modest P/E Ratio

On Monday, shares of Sovereign traded at $10, almost double its low for 1990. But given a Prudential forecast that the thrift will earn $1.40 in 1991, the projected price-earnings multiple is only 10 to 1 - about where the most highly rated thrifts trade.

A dedication to making low-risk mortgages has kept Sovereign earning money each quarter since 1988, an outstanding performance. Meantime, management has overreserved against loan losses that it expects to incur, Mr. Widom said.

Prudential is not the first Wall Street firm to put Sovereign on its buy list. Salomon Brothers Inc., for example, recommended the Wyomissing, Pa., thrift three months ago. But Sovereign, which operates in Pennsylvania and New Jersey, is more heartened by Prudential's recommendation, mainly because Prudential has a large business with retail investors.

So far, however, strong earnings and buy recommendations have done little to lift the stock price, said Karl H. Gerhart, chief financial officer.

Insiders Heavily Invested

The problem may be that Sovereign stock is too thinly traded. Directors and officers own about 35% of the stock, which makes it less appetizing to outsiders. That is an unusually high proportion of insider ownership in a $1 billion-asset thrift. Less than 10% of the company's stock is in institutional portfolios.

To boost volume, Sovereign has been scrambling to get more shares into the marketplace. So far this year, it has split the stock three times.

Other analysts second Prudential's appraisal of the company's strengths, but said now is not the time to buy Sovereign's stock. John A. Heffern, an analyst with Alex. Brown & Sons, keeps Sovereign on his neutral list.

The stock may become a good buy if Sovereign continues to buy thrifts, Mr. Heffern said. Sovereign recently bought a small thrift, Nassau Federal Savings and Loan Association of Princeton, N.J., from the Resolution Trust Corp. Mr. Gerhart said more acquisitions are likely, with small thrifts being the most desirable.

But to acquire, Sovereign will have to raise money. Mr. Gerhart said the thrift can add only another $200 million in assets before pushing the capital ratio down to uncomfortable levels. He is considering issuing more stock to boost capital for acquisitions.

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