Beaten-Up Bank Stocks Look Forward to Solid Third-Quarter Earnings - TheStreet

Beaten-Up Bank Stocks Look Forward to Solid Third-Quarter Earnings

Still, interest-rate fears and earnings warnings have cast a pall over the current earnings season.
Author:
Publish date:

Beaten-up bank stocks need good third-quarter results as badly as the

Cleveland Browns

need touchdowns.

But bank-stock investors needn't share Browns fans' despair, since certain financial institutions' third-quarter results should be good enough to clear the gloom surrounding their stocks, according to four money managers.

To be sure, much trepidation still cloaks the current earnings season. After all, a lot has happened since the second quarter.

Bank One's

(ONE) - Get Report

August

warning that third-quarter results would fall short of expectations due to problems in its credit-card division prompted deep fears. The stocks of other credit-card providers felt those fears, and investors fretted that other large banks might spring nasty earnings surprises.

In addition, the

Fed

raised interest rates in June and again in August. Those hikes pressured bank shares since investors felt that higher rates could depress loan growth and prompt a deterioration in credit quality. Then regulators added to the concern over credit quality by repeatedly saying banks had relaxed lending standards too much.

That miasma of worries, however, hasn't spooked four bank-stock investors, who, after showing Job-like patience, expect third-quarter numbers to justify their steadfastness.

Finding Volunteers

Memphis-based

First Tennessee

(FTN)

is a good example of a bank that, despite its woeful stock performance -- it's down a third from its 1999 high -- still has stout-hearted defenders.

One is Lisa Welch, who analyzes banks for

John Hancock's

(FRBAX) - Get Report

Regional Bank and

(FIDAX) - Get Report

Financial funds. She says that the bank's stock has performed badly because investors wrongly fear that higher rates will hurt First Tennessee's sizable mortgage business.

This, she says, is indeed the case at some banks, since higher rates mean fewer mortgage loans, reducing revenue. But higher rates mean First Tennessee will make more money from what the industry calls "mortgage-servicing rights," or the present value of future flows from mortgages.

"First Tennessee has a good balance between mortgage-servicing and origination," says Welch, who expects the bank to meet, or even beat, its third-quarter earnings estimate of 52 cents a share, as rendered by

First Call/Thomson Financial

. John Hancock holds First Tennessee shares.

Another Reason to Love Cleveland

Another overlooked bank is Cleveland-based

Charter One Financial

(COFI)

, according to Mark Davis, head of research for the

(BANCX)

Banc Stock Group fund.

"I just can't figure out why it's down so much," says Davis. The stock's 21% decline from its 1999 high does appear to be something of a mystery, especially as the bank's 1999 earnings are expected to grow by nearly 20% this year, well above par for a bank. Yet its 1999 price-to-earnings ratio is just 11.

"This is one of the most efficient operators in the U.S.," says Davis, who says the strong profit growth stems from a shift to small-business loans from less-profitable borrowers. Davis' fund holds Charter One stock.

Charge It

Credit-card companies are also attracting bargain hunters. Bank One's earnings warning clobbered the card sector because it centered on difficulties in the bank's

First USA

credit-card division.

Providian

(PVN)

,

Capital One

(COF) - Get Report

and

Metris

(MXT)

are all off sharply from their 1999 peaks.

But "third-quarter numbers will show that First USA's problems are unique," says Brian Divney, manager of

Timberline Financial Partners

, a Cherry Hill, N.J.-based financial services hedge fund. Divney declined to disclose his fund's positions.

Divney attributes First USA's struggles to the price sensitivity of its customers. The Bank One division attracted clients with attractive teaser rates and then lost some of them when fees and rates went up, he says.

By contrast, Capital One dispensed with the teaser-rate strategy over a year ago, he says. And Providian chiefly goes after lower-grade borrowers who may not be able to get credit elsewhere and, as a result, are less price sensitive, according to Divney. Metris, meanwhile, can rely on noncredit products like card insurance when price competition begins to bite, he adds.

The Cost-Savings Play

The third quarter is also critical for the nation's largest thrift,

Washington Mutual

(WM) - Get Report

, says Jim Benson, an analyst for the

(OAKMX) - Get Report

Oakmark fund, which holds the bank's shares.

Benson's going to be watching third-quarter numbers closely because they'll be the first released since Washington Mutual's operations were fully integrated with those of

Ahmanson

, the thrift Washington Mutual bought for $9.9 billion in March 1998.

Investors finally will be able to see clearly whether Washington Mutual is on the way to achieving the sort of cost cuts it expected from the merger, Benson says. "The Street has been skeptical, but I think Washington Mutual will prove that it can make savings," he says.

Why is he so sure? "The management of Washington Mutual has been in place for 10 years and has made around 20 acquisitions -- and virtually all of them have been well-executed," he says.