Take that to the bank

Fred A. Cummings of McDonald Investments makes his top sector picks

Banking stocks haven’t fared so well this year. Loan growth and merger activity-two important factors that have pushed up stock prices since 1995-have slowed this year. And with the specter of the Federal Reserve raising interest rates, it would seem banks’ prospects are more limited. But for banking analysts like Fred A. Cummings, managing director at McDonald Investments in Cleveland, there are still good stocks in the sector. The trick is to find banks with solid growth in their core businesses and not one-time gains that serve to boost earnings temporarily, he says.

“This is going to be a difficult year for bank stocks,” Cummings says, who has covered banks for 10 years. He cites rising rates, sluggish loan growth and declining merger and acquisition activity as stumbling blocks. He expects bank stock prices to rise only 4% this year, a far cry from the heady 20% gains from 1995 through 1997.

Also, some of the key drivers of bank growth are slowing. For example, average loan growth for commercial banks has slowed to 14.23% through June 30, down from 19.88% for all of last year, according to SNL Securities, a Charlottesville, Virginia, research and publishing firm that tracks the banking industry. M&A activity has also slumped this year to $64.3 billion, down from $285.6 billion in the same period last year, according to SNL. And the Standard & Poor’s Regional Bank Index is down 1% year-to-date, underperforming the S&P 500′s 10.9% gain.

As long as the “Goldilocks” economy persists-growth that’s neither too fast nor too slow, but just right-banks with strong regional franchises like Cummings’ top five picks should manage to outperform their peers.

Cummings’ five top picks, all rated “aggressive buy,” are Charter One Financial (Nasdaq: COFI); Comerica (NYSE: CMA); Fifth Third Bancorp (Nasdaq: FITB); FirstMerit (Nasdaq: FMER) and Firstar (NYSE: FSR). Cummings calls Fifth Third in Cincinnati “the premier large-cap growth bank in the country.” The bank just announced it will acquire CNB Bancshares (NYSE: BNK), a $7 billion Evansville, Indiana, bank. He estimates the acquisition will add 10 cents a share to its earnings.

Charter One, of Cleveland, is a low-risk company with a low efficiency ratio, Cummings says. Also, management has “changed their balance sheet mix to increase the level of home equity loans and automobile loans,” which do well in a slowing economy.

As for his remaining three picks, Cummings thinks Comerica in Detroit is an ideal takeover target for several banks, among them U.S. Bancorp (NYSE: FTU) and National City (NYSE: NCC). Firstar, a recently merged regional bank in Milwaukee, has excellent revenue growth, strong management and a low-risk balance sheet, says Cummings. And First Merit, of Akron, Ohio boasts a strong management and a rock-solid balance sheet.

Cummings’ Attractions

Company Exchange: Symbol

Price *

12-Month Price Target

P/E on Projected 1999 Earnings

Est. 5-Yr. Annual EPS Growth

Why Stock Will Outperform

Charter One Financial Nasdaq: COFI $25.75
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