General market catches bank shares dozing.

Bank shares slept, while the overall stock market rallied for the second day in a row.

The stock market surged on prospect of another cut in short-term interest rates and optimism on corporate earnings. But bank stocks were sluggish amid investor skepticism that banks would benefit much from another easing by the Federal Reserve.

Typical of the day's tone were BankAmerica Corp., up 37.5 cents to $42.375; NationsBank Corp., up 12.5 cents to $42; and Chemical Banking Corp., down 12.5 cents to $31.625.

Price movements were even flatter in the over-the-counter market. The Nasdaq bank index rose 0.14%, while the Nasdaq composite index was ahead by 0.45%. The Dow rose 27.01 points, or 0.85%, to 3,201.42. This followed a 37.83 point gain on Monday.

Among the day's big gainers was First Fidelity Bancorp., Lawrenceville, N.J., which was ahead $1, to $37.875, in late trading. PNC Financial Corp., Pittsburgh, rose 50 cents, to $53.

Over the weekend, Federal Reserve Board Chairman Alan Greenspan was quoted as leaving open the possibility of another rate cut.

The Fed disappointed the market earlier this month, when it did not ease despite persistently weak U.S. employment data. But at this point, another rate cut is generally regarded as a mixed blessing for banks.

An easing could help banks if the economy is bolstered and loan demand is enhanced.

Domino Effect on Rates

But at the same time, another downward ratchet in rates would oblige banks to cut the prime rate. That would likely narrow the yawning net interest margins that have powered bank earnings. Most observers believe bank rates paid to depositors are at rock bottom.

"From a competitive standpoint, there is nothing more banks can do on the liability side," said John J. Rooney, a bank analyst in New Haven, Conn., for Legg Mason, Wood Walker Inc. "They don't want to drive anyone else over to the brokerage community."

In fact, the last several rounds of rate cutting have been of diminishing value to banks, said Frank Barkocy of Advest Inc.

"It helped to maintain momentum in the stocks from the psychological point of view," he noted. "But the big gains for banks were in the earlier rounds of cutting," when margins first opened to historic widths.

Mr. Rooney thinks the key to earnings and stock price trends at this point is how fast banks reduce nonperformers.

That is particularly true in the Northeast, where the moribund real estate market has bottomed out. However, the market continues to be afflicted by vast amounts of excess commercial space.

After problems peak, the same will be true of the West Coast, the other area where the real estate market and economy boomed during the 1980s, then sunk into deep recession.

"For a bank, it's nice if you can reduce nonperformers by $50 million or so in any quarter," Mr. Rooney said.

"The comparison [with earlier quarters] looks good and the trend looks good. But if you you still have $1.2 billion of bad loans, it's going to take a long time to get them in order."

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