Time to Withdraw from Banks?
Investors looking for profits in money stocks need to be selective these days. Such is the advice of Stephen Biggar, Standard&Poor's analyst of banking and financial-services stocks, who focuses on large major regional and money-center banks.
Among that group, he has no buy recommendations, largely because of the prospect of higher interest rates, the deterioration of credit quality, and the weakness in capital markets. However, Biggar puts an accumulate label on Bank of America, SouthTrust, BB&T, and PNC Financial Services. At the other extreme, he has an avoid on KeyCorp and an outright sell on BankOne.
Online banking does not appear to have caught on with consumers, Biggar notes, since they seem to prefer dealing with a local branch.
These were among the comments Biggar made in an investing chat presented Apr. 23 by BusinessWeek Online and Standard&Poor's on America Online. He was replying to questions from the audience and BW Online's Jack Dierdorff. Edited excerpts from the chat follow. A complete transcript is available on AOL at keyword: BW Talk.
Q: Steve, is the stock market stuck in a trading range? Does S&P see a breakout?
A: I agree that it appears the market is in a trading range and, at the moment, lacks a real catalyst for the upside. Recent corporate-earnings announcements have not given much confidence in the profit picture, and until we get a reacceleration of earnings growth, I think the market will have a hard time advancing.
Q: Where do you see MWD (Morgan Stanley) in six months and one year? And how does S&P rate it?
A: I don't personally cover Morgan Stanley, but the S&P analyst who does have a 5-STAR, or buy, recommendation [in S&P's STARS or Stock Appreciation Ranking System]. He believes that the company has diversified businesses and is well-positioned to benefit from a rebounding economy.
Q: Your thoughts on JPM (J.P. Morgan Chase), please.
A: I have a hold recommendation on J.P. Morgan Chase. Much of their operations have been affected by weakness in capital markets, mainly investment banking and trading revenues. Venture-capital operations have also been doing poorly. With headwinds of a weak environment for capital markets and continued credit-quality deterioration, I would not expect the shares to outperform in the next six to nine months.
Q: What are your thoughts about PNC (PNC Financial Services)?
A: Although PNC has had a rough time of it lately, with a recent earnings restatement, I think they are making good progress on efforts to reduce their risk profile and emphasize high-return businesses in the asset-management and servicing areas. I believe this business-mix shift toward annuity-like and less cyclical revenue streams will lead to price earnings multiple expansion. And I rate the shares accumulate.
Q: What is your opinion on Wachovia Bank (WB)?
A: WB's latest quarter showed sluggish loan growth and weaker credit quality. The company's integration with First Union remains a main focus right now, and they have been seeing early success on cost-cutting related to the merger. But given soft trends for revenue growth, ongoing credit-quality problems, and a sluggish environment for the retail brokerage segment, I believe the shares are fairly valued trading in line with peers. I have had a hold on Wachovia since the merger.
Q: Your take on C (Citigroup)?
A: Although I like Citi's business model, which includes a very large geographic footprint and well-diversified business lines, I think there are several things that will hold back shares. These include recent writedowns and loss-reserve additions in Argentina, a corporate segment that has been under pressure from the weak equity-market environment, and credit-quality deterioration. As such, I don't see significant upside in the shares in the year ahead. I currently have a hold on Citigroup.
Q: What do you think of FleetBoston Financial (FBF)?
A: On FleetBoston, the recent big news is their plan to sell Robertson Stephens and focus on personal financial services and wholesale banking. They are also minimizing investments in Latin American operations. Although I like the moves to lower their risk profile, I believe that a continued reliance on other capital-market businesses will hold the shares back. It will also take time for them to reallocate capital from the Robertson Stephens sale, for which a buyer has not been announced.
Q: Why has there been so much credit-quality deterioration?
A: Most of it has to do with general weakness in the economy. Naturally, a rising unemployment rate disrupts the workforce and allows more people to miss their bills. However, banks were also aggressive in lending, and perhaps weakened credit underwriting as well. We have also had a large number of corporate bankruptcies lately, including KMart (KM), Enron (ENE), and Global Crossing (GBLXQ).
Q: Steve, did Greenspan's words last week suggesting no interest-rate hike immediately have any impact on the stocks you follow?
A: Banks did have a favorable week, and at least part of it could be attributed to comments that interest rates would be stable in the near term. However, I think much of last week's price movement had to do with the abundance of earnings releases. Clearly, banks have benefited from the lower interest-rate environment. But with rates at their low, banks will not witness much additional improvement in interest margins this year.
Q: What's your opinion about KEY (KeyCorp)?
A: I recently downgraded KeyCorp to avoid. The basic lending business has been under pressure from weaker loan demand and a sharp rise in loan charge-offs. Consumer-banking and the capital-partners units showed revenue declines in the first quarter. The company has been through several reorganizations, but they have not had much effect on earnings. I believe that the recent share-price rise, which came despite deteriorating fundamentals, makes the shares vulnerable.
Q: What buy recommendations do you have?
A: I don't currently have any buy recommendations among the stocks that I cover. I cover the large major regional and money-center banks, which are having difficulty growing their revenue base, are experiencing weaker credit quality, and face the prospect of higher interest rates by the end of the year. Nonlending areas have also been under pressure from a weak equity-market environment. Accordingly, I have difficulty finding a catalyst for a buy recommendation at the moment.
There are a few Southeast regional banks that I like [with accumulate rankings] including SouthTrust (SOTR) and BB&T (BBT), which are having an easier time keeping earnings momentum. As I mentioned, I also like PNC Financial (PNC), mostly for its changing business mix.
Q: What are your thoughts for ONE (BankOne)?
A: My recommendation is a sell on BankOne. Profits from the retail banking business have been flat, while commercial banking saw a 27% decline in the first quarter. Net charge-offs remain high, at nearly 3% of loans. Progress on turnaround efforts remains problematic as the company faces a weak outlook for revenue growth and a challenging environment for credit quality. I believe the shares are overpriced at 15 times my 2002 earnings estimate, which is a sizable premium to regional bank peers.
Q: What do you think of BAC (Bank of America)?
A: Bank of America...is the only money-center bank on which I have an accumulate. I believe the diversity of BAC's earnings and their large geographic footprint will be a key in maintaining earnings momentum relative to peers, given prevailing economic conditions. The shares trade at a discount to their peer group.
Q: How about Fifth Third Bank (FITB)?
A: Fifth Third frequently ranks best in many performance areas, including efficiency and return on equity. But the shares trade at a much higher valuation than the peer group, and I believe the better financial performance is already reflected in the share price. So I rank Fifth Third a hold.
Q: Steve, what would the economy have to do to produce more buys for you in banking?
A: I'd like to see more of an improvement in the economy to cause an acceleration in loan growth, signs of improvement in credit quality, and at least a stabilization in capital-market businesses.
Q: Do you think online banking is in its infancy, and do you see companies like ET (E*Group) and NTBK (NetBank) flourishing?
A: I think online banking has not yet caught the attention of most consumers. Customers still appear to want a local branch to do business. As yet, the more favorable deposit rates offered by online banks have not been enough to entice customers. Also, they have not been able to offer anywhere near as many products as large banks.
Q: So, bottom-line: Is this a time to hold off on putting new money into financial stocks, broadly speaking?
A: There are select areas within financial services that we like -- some in the brokerage sector, select insurance, and some small-cap regional banks
Among that group, he has no buy recommendations, largely because of the prospect of higher interest rates, the deterioration of credit quality, and the weakness in capital markets. However, Biggar puts an accumulate label on Bank of America, SouthTrust, BB&T, and PNC Financial Services. At the other extreme, he has an avoid on KeyCorp and an outright sell on BankOne.
Online banking does not appear to have caught on with consumers, Biggar notes, since they seem to prefer dealing with a local branch.
These were among the comments Biggar made in an investing chat presented Apr. 23 by BusinessWeek Online and Standard&Poor's on America Online. He was replying to questions from the audience and BW Online's Jack Dierdorff. Edited excerpts from the chat follow. A complete transcript is available on AOL at keyword: BW Talk.
Q: Steve, is the stock market stuck in a trading range? Does S&P see a breakout?
A: I agree that it appears the market is in a trading range and, at the moment, lacks a real catalyst for the upside. Recent corporate-earnings announcements have not given much confidence in the profit picture, and until we get a reacceleration of earnings growth, I think the market will have a hard time advancing.
Q: Where do you see MWD (Morgan Stanley) in six months and one year? And how does S&P rate it?
A: I don't personally cover Morgan Stanley, but the S&P analyst who does have a 5-STAR, or buy, recommendation [in S&P's STARS or Stock Appreciation Ranking System]. He believes that the company has diversified businesses and is well-positioned to benefit from a rebounding economy.
Q: Your thoughts on JPM (J.P. Morgan Chase), please.
A: I have a hold recommendation on J.P. Morgan Chase. Much of their operations have been affected by weakness in capital markets, mainly investment banking and trading revenues. Venture-capital operations have also been doing poorly. With headwinds of a weak environment for capital markets and continued credit-quality deterioration, I would not expect the shares to outperform in the next six to nine months.
Q: What are your thoughts about PNC (PNC Financial Services)?
A: Although PNC has had a rough time of it lately, with a recent earnings restatement, I think they are making good progress on efforts to reduce their risk profile and emphasize high-return businesses in the asset-management and servicing areas. I believe this business-mix shift toward annuity-like and less cyclical revenue streams will lead to price earnings multiple expansion. And I rate the shares accumulate.
Q: What is your opinion on Wachovia Bank (WB)?
A: WB's latest quarter showed sluggish loan growth and weaker credit quality. The company's integration with First Union remains a main focus right now, and they have been seeing early success on cost-cutting related to the merger. But given soft trends for revenue growth, ongoing credit-quality problems, and a sluggish environment for the retail brokerage segment, I believe the shares are fairly valued trading in line with peers. I have had a hold on Wachovia since the merger.
Q: Your take on C (Citigroup)?
A: Although I like Citi's business model, which includes a very large geographic footprint and well-diversified business lines, I think there are several things that will hold back shares. These include recent writedowns and loss-reserve additions in Argentina, a corporate segment that has been under pressure from the weak equity-market environment, and credit-quality deterioration. As such, I don't see significant upside in the shares in the year ahead. I currently have a hold on Citigroup.
Q: What do you think of FleetBoston Financial (FBF)?
A: On FleetBoston, the recent big news is their plan to sell Robertson Stephens and focus on personal financial services and wholesale banking. They are also minimizing investments in Latin American operations. Although I like the moves to lower their risk profile, I believe that a continued reliance on other capital-market businesses will hold the shares back. It will also take time for them to reallocate capital from the Robertson Stephens sale, for which a buyer has not been announced.
Q: Why has there been so much credit-quality deterioration?
A: Most of it has to do with general weakness in the economy. Naturally, a rising unemployment rate disrupts the workforce and allows more people to miss their bills. However, banks were also aggressive in lending, and perhaps weakened credit underwriting as well. We have also had a large number of corporate bankruptcies lately, including KMart (KM), Enron (ENE), and Global Crossing (GBLXQ).
Q: Steve, did Greenspan's words last week suggesting no interest-rate hike immediately have any impact on the stocks you follow?
A: Banks did have a favorable week, and at least part of it could be attributed to comments that interest rates would be stable in the near term. However, I think much of last week's price movement had to do with the abundance of earnings releases. Clearly, banks have benefited from the lower interest-rate environment. But with rates at their low, banks will not witness much additional improvement in interest margins this year.
Q: What's your opinion about KEY (KeyCorp)?
A: I recently downgraded KeyCorp to avoid. The basic lending business has been under pressure from weaker loan demand and a sharp rise in loan charge-offs. Consumer-banking and the capital-partners units showed revenue declines in the first quarter. The company has been through several reorganizations, but they have not had much effect on earnings. I believe that the recent share-price rise, which came despite deteriorating fundamentals, makes the shares vulnerable.
Q: What buy recommendations do you have?
A: I don't currently have any buy recommendations among the stocks that I cover. I cover the large major regional and money-center banks, which are having difficulty growing their revenue base, are experiencing weaker credit quality, and face the prospect of higher interest rates by the end of the year. Nonlending areas have also been under pressure from a weak equity-market environment. Accordingly, I have difficulty finding a catalyst for a buy recommendation at the moment.
There are a few Southeast regional banks that I like [with accumulate rankings] including SouthTrust (SOTR) and BB&T (BBT), which are having an easier time keeping earnings momentum. As I mentioned, I also like PNC Financial (PNC), mostly for its changing business mix.
Q: What are your thoughts for ONE (BankOne)?
A: My recommendation is a sell on BankOne. Profits from the retail banking business have been flat, while commercial banking saw a 27% decline in the first quarter. Net charge-offs remain high, at nearly 3% of loans. Progress on turnaround efforts remains problematic as the company faces a weak outlook for revenue growth and a challenging environment for credit quality. I believe the shares are overpriced at 15 times my 2002 earnings estimate, which is a sizable premium to regional bank peers.
Q: What do you think of BAC (Bank of America)?
A: Bank of America...is the only money-center bank on which I have an accumulate. I believe the diversity of BAC's earnings and their large geographic footprint will be a key in maintaining earnings momentum relative to peers, given prevailing economic conditions. The shares trade at a discount to their peer group.
Q: How about Fifth Third Bank (FITB)?
A: Fifth Third frequently ranks best in many performance areas, including efficiency and return on equity. But the shares trade at a much higher valuation than the peer group, and I believe the better financial performance is already reflected in the share price. So I rank Fifth Third a hold.
Q: Steve, what would the economy have to do to produce more buys for you in banking?
A: I'd like to see more of an improvement in the economy to cause an acceleration in loan growth, signs of improvement in credit quality, and at least a stabilization in capital-market businesses.
Q: Do you think online banking is in its infancy, and do you see companies like ET (E*Group) and NTBK (NetBank) flourishing?
A: I think online banking has not yet caught the attention of most consumers. Customers still appear to want a local branch to do business. As yet, the more favorable deposit rates offered by online banks have not been enough to entice customers. Also, they have not been able to offer anywhere near as many products as large banks.
Q: So, bottom-line: Is this a time to hold off on putting new money into financial stocks, broadly speaking?
A: There are select areas within financial services that we like -- some in the brokerage sector, select insurance, and some small-cap regional banks
