Banks will do the best
Interview: Fitzsimmons, Kevin---Sandler O'Neill Partners---Analyst
>> we’re back. shares of ford fell 3% today after the company said 2004 earnings could miss the average analysts’ estimates by as much as 10 cents a share. ford said it may earn as little as $1.20 a share. ford says the rost from its automotive business will be the highest in three years because of lower costs in europe and reduced capital spending. yesterday, g.m. raised its full-year forecast. rite aid is demoting its chief financial officer because an s.e.c. probe into his work at a previous employer. chris hall is in settlement talks with the securities and exchange commission over his action at ralph’s grocery company where top executives manipulated the company’s finances. ralph’s was later bought by kroger’s which had to restate three years’ worth of earnings. hall proposed a settlement neither admitting nor denying wrongdoing. rite aid is demoting hall to a supervisory role in real estate% -and planning. and banks start to report earnings next week in earnest. our next guest says that banks that do commercial lending have more exposure to capital markets will do the best. kevin fitzsimmons is banking industry analyst at sandler o’neill partners. and he joins us here in our studios. kevin, let’s talk about suntrust. you have a hold on it but it’s one of the for first ones and the big ones out of the box, if you will, on monday. you’re estimate is in line with the street, which is for $1.19 per share. let’s not talk about rear-view mirror but going forward in terms of banks in the southeast region like suntrust. what’s your forecast here? why a hold on sun from trust -- suntrust?%
>> on the group overall, we’re cautious. the bank group in general has outperformed the market for three consecutive years. that’s pretty unprecedented. we see going into this next year not looking just one quarter but out a whole year that those banks that are more exposed to a recovering economy, either through commercial lending or through capital markets businesses, will do better. now, that being said, this isn’t a one-quarter story so we don’t expect to see robust numbers from suntrust. we are reporting in line because we’re looking more for what the company says on the conference call for further out.
>> we’ve been seeing the mortgage application index falling off a cliff from an all-time high in june or july. that has to hurt banks.
>> it does. and it hurts banks in varying degrees. i think the more traditional and thrift-like banks, the banks that do a lot of mortgage lending are the ones that have really done well over the past few years and those are the ones most exposed going into the next few quarters. what i look for is what banks have more levers to pull to get the earnings growth kept going. the banks surviving on the mortgage boom and don’t have anywhere else to go in terms of earnings will have a tough time. a bank like suntrust will have a mortgage servicing business that is counter cyclical to the mortgage origination business. they also have a sizable wealth management and capital markets business that will help, as well. and on top of that, corporate lending. so while we were positive on suntrust when we first initiated on them, the stock has risen up near our price target after the b.&a and fleet deal was announced and speculation that came after that.
>> you’re chasing synovus as the stock has doubled the performance of the s&p financials and broader market but you just put a buy on the sock so clearly you see something there and you’re not late to the game. boldly going after it. why’s that?
>> i had to dig deep on synovus because on the surface an investor would look at the p.e. multiple and think it’s very expensive. but you have to remember synovus has always traded at a premium to the bank group mainly because it has a processing subsidiary that provides additional growth that a traditional bank wouldn’t have and it helps with consistency of earnings. we think that looking forward synovus has more leverage to recovery from that processing sub, also from its commercial lending and also from its margin expanding. now, even though on the surface it’s expensive to the group, it’s well below its historical average over the past 10 years and has been trending up since april so we don’t think we’re late on the game on this.
>> we’re under a minute, now, and i’d like to talk about acquisitions. i know suntrust is a target. do you think they will stay independent of citigroup? and do you see other merger activity going on in your region this year?
>> the southeast is always coming up in terms of m&a and it’s because it’s such an attractive region in terms of demographics and growth that’s forecasted there. suntrust always comes up, it seems lately, with speculation because it’s had flat earnings growth the past couple of years. we think going forward that―i like to say banks are not bought, they’re sold. in other words, a bank has to want to sell itself. and we generally think that suntrust wants to show improved performance.
>> tough call. thanks. we’re out of time. that’s kevin fitzsimmons, banking analyst with sandler o’neill partners. stay with us, because last month a former executive at merrill pled guilty to stealing $43 million from the firm. we’ll take a closer look at the dan gordon story and what his case may mean for one of the country’s biggest investment banks.
