Banks hit in broad market selloff sparked by fear of higher rates.

Major banking stocks stumbled for the third straight day on Wednesday amid a general market selloff prompted by concerns about inflation and rising interest rates.

Some observers now believe the

Federal Reserve Board could lift short-term rates again soon, perhaps next week. It would be the sixth round of credit tightening from the central bank this year.

Wednesday's market slippage came on top of the 67.63-point drop in the Dow Jones industrial average on Tuesday.

Citicorp closed Wednesday off 25 cents to $43.50; Wells Fargo & Co. down $1.625 to $149.625, First Chicago Corp. off 87.5 cents to $47.625, NationsBank Corp. down 25 cents to $49.125, and Barnett Banks Inc. unchanged at $45.375

One Wall Street analyst is cautioning that bank equities also hold particular risks for buyers right now. 'This is the time in the cycle when investors tend to get trapped in bank stocks," according to Lawrence W. Cohn of PaineWebber Inc.

"By most measures the group looks cheap," he said. That is because banks' stock dividend yields are relatively high and significant hikes in payouts are anticipated.

Moreover, stock price-to-earnings multiples for banks are low in contrast to other companies. But Mr. Coho warned that banks-earnings are highly cyclical.

The most important cycle, in his view, is the credit cycle, which investors can monitor by looking "normalized earnings."

To normalize, Mr. Cohn factors out nonrecurring income and expense items from reported earnings. He factors in average loan-loss provisions and credit costs instead of current charges.

Mr. Cohn's conclusion is that reported bank earnings now significantly exceed normalized earnings, a clear warning signal for investors.

"If there were still a baseball season, we would characterize the bank group as now being in the seventh or eighth inning," Mr. Cohn said. Chances to score remain but they are dwindling.

For investors, big plays in bank stocks are now probably limited to a few companies with especially good prospects, and takeover targets, he said.

Mr. Cohn likes the prospects of BankAmerica Corp., Bank of Boston, and Bank of New York, and sees Midlantic Corp. and Shawmut National Corp. as takeover plays.

Bucking Wednesday's general downturn was First Interstate Bancorp, up 37.5 cents to $82 after receiving a "buy" rating from Goldman, Sachs & Co.

Goldman's Robert Albertson said, "The outlook for revenues is improving fairly noticeably" at the bank, which on Tuesday gave a major presentation to analysts in New York.

Mr. Albertson said he had been pleased with the cost savings that were described at that meeting. "Altogether, the earnings trend is going to start approaching 20% and performance ratios of this company are going to be in pretty fancy territory as well."

The analyst raised his estimate for core earnings by 35 cents to $8.05 per share for this year and 55 cents t0 $10.05 for next year. His 12-month price target for the stock is $106 a share.

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