Earnings fears seen behind bank stocks' dismal performance.

The recent flogging of bank stocks reflects investor fears that upcoming quarterly results will reveal that the industry's earnings momentum has faltered, according to the banking analyst for PNC Investment Management and Research.

"A couple of disappointing results will hurt these stocks, even though I expect earnings will be pretty good for most banks," said Charles M. Vincent, at PNC Investment, which manages some $60 billion of investment funds.

Negative earnings surprises will be interpreted in the markets as reason to worry even more about the fourth quarter, he said, particularly since the Federal Reserve Board may hike interest rates again next month.

After enduring a dismal September, banks stocks have started OCT0ber in no better form. The big difference over the past several days has been the overall weakness in the stock market.

But bank stocks, lacking any momentum of their own right now, are at the mercy of the tide in the larger market, the analyst said.

The market overall is waiting for the Fed to act, even as rates continue rising in the bond market and effectively pull investment funds from stocks.

And Mr. Vincent said he doubts banks would be able to handle further rate increases as well as they did earlier in the year.

So far, the banks have been able to match the Fed's rate increases with prime rate increases and pass the cost on to borrowers. The growing competition in the lending market makes that less likely now, he said.

At the same time, he said, banks are finally trying to bring back lost deposits. "If they are not successful enough, they may have m turn increasingly to purchased funds.

"That could get costly, especially if the Fed acts again," he said. "The liability side could very well heat up. It's not a very pleasant prospect for [net interest] margins of the banks."

If bank margins were stable or improving a bit, a case could be made that accelerating loan growth means the better revenues and the industry stocks would look attractive, "but it doesn't look that way over the next year," he said. "Beyond that, the credit-quality cycle becomes a possible problem."

In the hefty competitive loan market, banks say they have been giving a little on price and terms, but not underwriting quality; Mr. Vincent said.

"But I have m believe at some point they will give in this area, if they have not quietly been doing it already," he said.

Where are the potential problems? "Follow the money. It's the consumer," he said.

"Home equity loans plus credit card debt equals problems if rates rise or if you get a downturn in economy," he said. "There are people who may not be able to meet their obligations under those situations."

The analyst sees the bank stocks basically as unexciting market performers well into next year, with a few exceptions.

He likes NationsBank Corp., BankAmerica Corp., Norwest Corp., and Fleet Financial Group.

NationsBank has been "undeservedly oversold," he said.

The bank may generate better earnings over the next year than much of the rest of the industry, he said. But many investors seem fearful that this aggressive super-regional company will try to capitalize on the new nationwide interstate banking law by making a large acquisition that could cause dilution for shareholders.

NationsBank chairman Hugh L. McColl was perhaps the most ardent and visible proponent of the new law. But Mr. Vincent does not think the bank will make any moves the market would view as reckless.

Similarly, BankAmerica shares have been hurt by investors' wariness that it may make a major move in advance of the new interstate era, he said,

But he noted that earnings of the San FranCisco bank have broken out their recent range. Even better results could be in store with the California economy finally emerging from its long recession.

Mr. Vincent likes Fleet because of the restructuring it is now undergoing. And he like Norwest because of its retail-store concept for banking.

Norwest, with a large interstate franchise, will be among the largest beneficiaries of the provision of the new law, which permits consolidation of affiliates in various states and interstate hunch banking no later than 1997.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER