Hold the Mayo? No, Bank Analyst Shrieks: Sell It!

In a recent magazine article, Prudential banks analyst Michael Mayo told investors to expect "no-holds barred research" from him. Thursday, in slamming the banking sector, Mayo illustrated just how few holds will indeed be barred.

While most analysts hedge negative opinions on a stock with words like "neutral" and "accumulate," the newly appointed Prudential analyst cavalierly slapped nine sell ratings and seven holds on the banks he began covering. Only three of 19 received strong buys. The Philadelphia Stock Exchange/KBW Banks Index, which measures the country's 24 largest banks, edged up 0.4%.

Mayo, who was let go from Credit Suisse First Boston in October following the firm's buy of Donaldson Lufkin & Jenrette, has plenty of things to say about the banking sector. Many in the industry, including Mayo, believe he was let go from CSFB for being too negative on the banks he rated, a situation that can cause friction regarding the lucrative underwriting relationships that investment banks are believed to covet. In December, Prudential indicated it wanted to move toward more objective research.

Mayo Doesn't Hold Back on Banks Nine banks rated "Sell"
	Rating	Price Change	Close
Bank of America (BAC:NYSE)	Strong Buy	+$0.97	$53.72
Bank of New York (BK:NYSE)	Sell	-0.82	50.65
Bank One (ONE:NYSE)	Sell	+0.18	36.89
BB&T (BBT:NYSE)	HoldT	+0.10	36.66
Citigroup (C:NYSE)	Strong Buy	+0.30	50.75
Comerica (CMA:NYSE)	Hold	+0.95	64.95
Fifth Third (FITB:Nasdaq)	Hold	+0.50	55.88
First Union (FTU:NYSE)	Strong Buy	+0.39	34.09
FleetBoston (FBF:NYSE)	Sell	--	40.50
J.P. Morgan Chase (JPM:NYSE)	Hold	-0.01	50.24
KeyCorp (KEY:NYSE)	Sell	-0.06	27.44
Mellon Financial (MEL:NYSE)	Sell	-0.60	45.80
National City (NCC:NYSE)	Sell	-0.05	27.35
PNC (PNC:NYSE)	Hold	-0.33	68.90
State Street (STT:NYSE)	Sell	-0.47	102.92
SunTrust (STI:NYSE)	Hold	+0.75	67.75
U.S. Bancorp (USB:NYSE)	Sell	-0.03	22.87
Wachovia (WB:NYSE)	Sell	-0.13	63.95
Wells Fargo (WFC:NYSE)	Hold	-0.47	51.71
Source: Prudential Securities, TSC Research

It certainly has obtained that with Mr. Mayo in place. Many well-liked bank stocks got the thumbs down from Mayo today. Bank of New York (BK), Bank One (ONE), FleetBoston Financial (FBF), KeyCorp (KEY), Mellon (MEL), National City (NCC), PNC Financial (PNC), State Street (STT), U.S. Bancorp (USB) and Wachovia (WB) were all rated sell. In addition, seven banks were rated a hold and three were given a strong buy.

Mayo clearly thinks the earnings growth of the past decade is unsustainable and that banks face a tougher environment in the years ahead. According to the report, earnings growth should fall to about 7% this decade, or about half the 16% growth seen in the last 10 years. He notes that this period of interest-rate easing also carries the weight of deteriorating fundamentals. Earnings could fall short if economic growth, capital markets or interest rates are worse than expected.

The report also turned around some recent notions about what will fuel solid growth. The Bank of New York, Mellon and State Street have been praised in recent years -- as well as rewarded with high multiples -- for their continuous push into so-called fee-based businesses, such as trust and wealth management. At a time when many banks were getting squeezed by volatile interest rates that make lending a more risky business, the banks were praised for broadening out to more stable business lines.

In announcing his rating initiations Thursday, Mayo said with respect to Mellon, "The 'growth businesses' may not be as growth-like as previously thought, given a tougher asset management environment and what we believe is a significant slowdown in securities trading volumes."

Meanwhile, First Union (FTU), which is plodding through a restructuring and has seen its fair share of problems this year, was rated a strong buy. Mayo thinks the restructuring looks good so far and says results may fall short in 2001 on revenue weakness but will "pave the way for value creation after years of value destruction. This inflection point is often the best time to buy a stock."

Bank One, also undergoing a revamp under the well-regarded Jamie Dimon, was initiated as a sell. "Our view has been that the new CEO is not Hercules -- problems are bigger than he is."

Don't hold back, Mayo.

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