Back stocks are expected to recover from their mediocre performance last week as investors focus on what are expected to be excellent third-quarter earnings.
In the five trading days that ended last Thursday, bank shares lost 0.5% in value, according to the American Banker index. But banks still managed to outperform the Dow Jones industrial average, which fell 2.5%.
On Friday, bank stocks were generally up while the Dow gained 4.75 points to 3,544.50 in late-afternoon trading.
Wachovia's Corp.'s shares led the pack, gaining $2.375 to $36.50. Alex. Brown & Sons upgraded the stock to "buy" from "neutral" on Friday. Bankers Trust New York shares rose $1.625 to $79.625. First Union Corp.'s shares rose 75 cents to $46.25.
Wall Street Agrees on Profits
While there is general agreement on Wall Street that the upcoming results from banks will be impressive, there is disagreement on how investors will treat the stocks.
Thomas Hanley of First Boston Corp. expects a 25.5% year-over-year earnings increase in the 35 banks tracked by his firm, including a 12.8% gain for the money-center banks and 40% gain for superregionals.
Among the leading bulls on banks, Mr. Hanley has increased 1993 and 1994 earnings estimates on many banks he follows. He anticipates strong trading and foreign exchange results, lower loan-loss provisions, and "only modest [net interest] margin compression."
The pressure on margins will be felt in securities portfolios because of a a less advantageous bond market.
The spread between the two-year Treasury bill and three-month certificate of deposit rate has contracted over the past few months, from an average 86 basis points in the second quarter to 77 basis points in mid-September, Mr. Hanley said.
But "it is important to remember that this represents only a third of bank earning-asset levels, while spreads on the lending side of the ledger should be holding relatively firm."
Mr. Hanley noted that the prime rate -- still 6% for the most of the industry -- is a wide 300 basis points over the fed funds rate.
Also optimistic, particularly about many larger banks, is analyst James M. Rosenberg of Lehman Brothers Inc.
Mr. Rosenberg sees upside stock price potential of 50% or more in the next 18 months for Citicorp, Chase Manhattan Corp., Chemical Banking Corp., and First Chicago Corp. as well as Union Bank, San Francisco.
He also sees 35% to 45% upside in BankAmerica Corp. and Bank of New York Co., and about 25% upside in Wells Fargo & Co., First Interstate Bancorp, and Republic New York Corp.
Note of Caution
Some other analysts are wary, Third-quarter news, while sure to be good, "cannot be permanent" and "will probably fuel the group's last trading opportunity," said Brent B. Erensel of UBS Securities Inc.
The industry's rate of earnings growth "is converging with the market," he noted. "We do not see how things can get any better and urge caution for investors."
The UBS analyst believes that "few bank stocks will outperform the market during the next 18 months after a 30-month bull market that ended in April.
"Ahead, those banks that can differentiate themselves with high-quality, substantiable revenue growth should be the superior performers," he said.
