Is Bankers Trust Past Its Peak?

Shares of Bankers Trust have been on the rebound, despite adverse publicity over its proprietary trading in securities and derivatives. The stock has climbed in recent days to 69, up from 65. But don't bank on further advances, warn some pros. They worry that, since these activities account for 87% of earnings, results for 1995 will be volatile.

"The stock deserves the lowest price-earnings multiple in the banking industry because of the high risk that it presents to investors," says veteran analyst George Salem of Prudential Securities. He thinks the price will tumble to the 50s. So he recommends selling the stock.

Bears note that Bankers Trust is in the midst of a controversy over its derivatives business. Government regulation, which could curtail the volume of these highly sophisticated businesses, is currently being talked about in the U.S. and countries overseas, they warn. The Securities & Exchange Commission is said to be probing the impact of such derivatives on certain shareholders of companies that have suffered losses. Furthermore, Standard & Poor's has put some $5.6 billion of Bankers Trust debt on credit watch because of its heavy reliance on proprietary trading.

Salem cautions that other factors will likely contribute to an earnings contraction at Bankers Trust. The company, he expects, will have to provide a loan-loss provision of about $30 million per quarter just for possible routine losses. And he sees fewer gains on asset sales and a flattening-out of revenues from selling fewer derivatives. Therefore, Salem predicts flat quarterly earnings ahead. He says 1995 earnings are "virtually impossible to predict" because of Bankers Trust's dependence on derivatives. A spokesman said investors should not overlook the fact that proprietary trading has been profitable over the years.

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