January 13, 1999
Banking Bets for 1999
By Paul R. La Monica
WITH THE ASIAN crisis, Russian default and hedge-fund closures becoming ancient history, the banking sector was looking forward to a profitable 1999. Then came Brazil. Banks were one of the sectors hardest hit by the resignation of that country's central bank chief and the simultaneous swoon of its currency and stock markets on Wednesday. After rising close to 5% so far this year, banks, especially money centers with Latin American lending operations, swooned. Citigroup (C) dropped 6.4%, and J.P. Morgan (JPM) fell 4.7%.
Do we sniff opportunity? Many analysts are bullish on banks now. Even pundit Abby Joseph Cohen is a banking bull. To find a few of the bargains in the sector, we asked analysts to name their favorite banking stocks that were still trading below their 1998 highs. Of course, that was an easy assignment because most banking stocks are nowhere near last year's peaks.
Bank Bargains
Many well-run banks still trade below their 1998 highs. Here are some analysts like best.
COMPANY CURRENT
PRICE* 52-WEEK
HIGH P/E using
Curr. FY Est. NEXT 3-5 YR.
EST. EPS GR. RATE PRICE/
BOOK
Commnty Fst -Nd
(CFBX) $21.13 $27.00 11.87 13.67 2.40
First Tenn Natl
( FTEN) 38.25 38.94 17.93 12.56 4.65
First Union Cp
( FTU) 65.06 65.69 13.10 12.06 3.71
Fleet Finl Grp
( FLT) 46.75 46.75 14.82 11.12 3.13
Mellon Bk Corp
( MEL) 71.56 78.00 17.56 12.77 4.28
North Fork Bcp
( NFB ) 23.31 27.33 13.17 11.86 3.83
* Price as of January 8, 1999
Most analysts expect strong commercial lending volume to boost bank earnings in the first part of this year as the domestic economy continues to roll along. Of course, if Brazil gets much worse, all bank stocks are likely to suffer in the short term. If you're nervous, steer clear of multinationals; they're the most vulnerable to international slowdowns.
Sandy Flannigan, a Wall Street Journal All-Star analyst with Merrill Lynch, likes Wells Fargo (WFC) and Bank One (ONE) -- two of SmartMoney's stock picks for 1999. Both banks completed large mergers last year, which means there are lots of opportunities to cut costs and thus boost earnings. In addition, she thinks First Union (FTU) is a buy. The company, which trades 5% below its 1998 high has come a long way in integrating its 1997 acquisition of CoreStates in Philadelphia.
Frank Barkocy, a Wall Street Journal All-Star analyst with Josephthal & Co., also likes First Union. Among the large regionals his favorites are Fleet Financial (FLT) and PNC (PNC). First Union and Fleet, especially, are building their fee-based income, thus reducing their vulnerability to interest rate swings. Last year, First Union bought consumer lender the Money Store as well as investment brokerage Wheat First Butcher Singer (now known as Wheat First Union). Fleet bought the credit card operations of Advanta (ADVNA), discount brokerage Quick & Reilly and asset management firm Columbia Management.
Mellon (MEL), a favorite of Jim Schutz, a Wall Street Journal All-Star analyst with ABN Amro, now gets nearly two-thirds of its revenue from fee-based businesses such as its Dreyfus mutual fund unit and custody services management. The company, which has undergone some shuffling in the top ranks of management, is pricier than other regional banks, trading at about 17.5 times earnings estimates. But its expected long-term growth rate of nearly 13% is better than the group average.
For value investors, Schutz recommends smaller players like Community First Bankshares (CFBX), a North Dakota-based bank that has been a voracious acquirer of community banks in attractive markets such as Arizona and Colorado. It trades at just 12 times earnings, a discount to the company's expected earnings growth rate of nearly 14%.
Potential Takeover Candidates
Year 2000 computer confusion could drive many regionals into the arms of bigger banks.
COMPANY CURRENT
PRICE* 52-WEEK
HIGH P/E USING
CURR. FY EST. STATES WHERE
BANK HAS
MAJOR PRESENCE PRICE/
BOOK
Amsouth Bcp
(ASO) $44.56 $45.63 16.50 Alabama and Florida 3.72
First Am Tenn
( FAM) 45.00 54.31 13.43 Tennessee and Mississippi 3.01
Hibernia Corp A
( HIB) 16.75 21.94 12.64 Louisiana and Texas 2.16
Hubco Inc
( HUBC) 32.00 37.86 13.01 New Jersey and Connecticut 1.96
Huntington Banc
( HBAN) 31.25 34.03 14.85 Ohio and Florida 2.98
Keycorp New
( KEY ) 33.50 43.13 12.64 Ohio and New York 2.65
* Price as of January 8, 1999
Speaking of community banks, Jackie Reeves, an analyst with Salomon Smith Barney, likes First Tennessee (FTEN) and North Fork Bancorp (NFB). First Tennessee has rapidly growing mortgage and mutual fund businesses. The bank trades at about 18 times earnings estimates. North Fork Bancorp has acquired several smaller thrifts and banks on Long Island. Earnings are expected to increase 12% this year, and the stock is really cheap, trading at a multiple of just 13 times 1999 estimates.
Can investors expect more bank mergers in 1999? Most analysts think so. But they may not happen at the multiples we saw previously. Why? Small banks that find it difficult to become Y2K compatible may be desperate for a takeover. "It will no longer be a bad news is good news scenario in terms of consolidation for 1999," says Reeves. "There could be no premium deals and takeunders as Y2K compliance becomes more and more important."
Tom Theurkauf, an analyst with banking specialists Keefe, Bruyette & Woods thinks that the disparity in P/E ratios between some of the regional banks will drive more consolidation. Strong performers like Fifth Third (FITB) and Firstar (FSR) are valued more like growth stocks. Each trades at a multiple more than 20 times estimated 1999 earnings. Then you have big regional banks such as Keycorp (KEY) and BankBoston (BKB) that trade at only about 13 times 1999 estimates. That means that the higher P/E banks could continue to use their stock in transactions to pick off rivals with lower valuations. "In my mind this is a market ripe for deal making," Theurkauf says.
Theurkauf believes Keycorp could be vulnerable. In addition to its below average valuation, he says the company, which has largely stayed out of the recent round of bank mergers after making several acquisitions in the early '90s, has posted below average earnings growth. Earnings for 1998, scheduled to be reported on Jan. 19 are only expected to increase 8% over 1997 and earnings growth for this year is expected to be slightly below 10%.
Some smaller banks mentioned as targets are Amsouth (ASO) and First American (FAM). Reeves says both banks are in Southeastern markets that are still fairly fragmented. Barkocy mentions three banks that he sees as potential takeover targets: Hibernia, (HIB) a leading bank in Louisiana; Hubco (HUBC), which is based in New Jersey; and Huntington Bancshares (HBAN), which issued a strong earnings report on Wednesday. Huntington has branches in 12 states but is particularly strong in the Midwest with a large presence in Ohio and Michigan.
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