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Merrill ratings hit banks
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January 6, 1998: 1:59 p.m. ET
Investment bank downgrades banks on Asian worries, sinking stocks
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NEW YORK (CNNfn) - Investors punished banking stocks Tuesday after Merrill Lynch offered pessimistic opinions on several of its biggest global players.
Merrill Lynch's rising concern about the financial shares arose from what is becoming a common worry; Southeast Asian economic instability.
The investment bank said it believes the drag of Southeast Asia will create global deflation that could, in turn, affect both future credit costs and trading profits at banks with exposure in that part of the world.
"Multinational/trust banks will probably broadly deliver on Wall Street estimates," said Merrill Lynch analyst Judah Kraushaar. "However, we expect the quality of earnings to be poor as securities gains and other unusual items will commonly be used to offset weak trading results."
Because of those assessments, Merrill Lynch took the following actions against several banks:
- Citicorp (CCI): Downgraded the stock's near-term rating to accumulate from buy (long-term rating remains a buy). Also lowered its 1998 earnings estimate to $9.00 per share from $9.50 per share.
- Chase Manhattan (CMB): Reduced its 1998 earnings forecast to $9.20 per share from $9.70 per share.
- BankAmerica (BAC): Cut its 1998 earnings estimate to $4.75 per share from $4.85 per share.
Citicorp shares experienced the sharpest sell-off in Tuesday afternoon trading, dropping 6-1/4 to 124-1/8. Chase Manhattan lost 5-7/16 to 107 and BankAmerica shed 3-1/4 to 69-9/16.
Other bank shares were drawn into the fray, including J.P. Morgan (JPM), off 4-5/16 to 111-11/16 and Wells Fargo (WFC), down 5-5/8 to 330-1/8.
Merrill Lynch's Kraushaar went on to chastise many banks for keeping tight-lipped about the extent of their problems.
"In generally failing to forewarn of possible earnings risks, we are increasingly worried that many bank managements could have their credibility tested over the coming year," he said.
After having a strong three-year run, the banking sector has begun to be held back by what is known as a flat yield curve, which shrinks the amount of money a bank makes on a loan.
If a bank is borrowing its money at a 5.5 percent rate and lending it out to its customers at an 8 percent rate, the bank collects a good return.
However, if the interest rate at which money is loaned out to customers decreases, then the flatter yield curve cuts into banks' earnings.
Tony Dwyer, chief market strategist at Ladenburg Thalmann, said that he agreed with Merrill Lynch's short-term assessment but doesn't recommend a full stampede from financial equities.
"I don't think you go out and sell every bank stock you own. I just think you may want to wait a little bit to buy some," he said.
Robert Albertson, director of banking research at Goldman Sachs, said that Merrill Lynch was overreacting and the wounded bank stocks are good values.
"We're in a phenomenal buying period here for bank stocks. I'd be all over them," he said. Albertson feels that too much is being made over the flat yield curve and said that the yield curve was much the same in 1995 and banks still registered strong earnings results.
While admitting that the fourth-quarter results for banks probably will be weak, Albertson claimed that the only thing that would scare him away from banks would be either a domestic or global recession.
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