Stocks: Blip or Bear Market? Analysts Debate Bank Stocks' Retreat

Bank stocks plummeted for the fifth day in a row on Wednesday, with some Wall Street analysts labeling the setback a bull market interlude and others warning that investors may have turned cautious on the industry.

The slump was felt by nearly all of the nation's 50 largest banks, and in some cases the slides were sharp. Citicorp, for instance was off $1.625 to $64.625 while BankAmerica Corp. fell $2.875 to $59.875.

The American Banker index fell tk%, while the S&P 500 index fell tk%.

The retreat, which began last week, is a stunning shift in direction for these stocks. Banks have mostly soared in value this year and often led the entire stock market upward.

"It looks like your typical quarterly trend," said Katrina Blecher of Gruntal & Co., New York. "Halfway through earnings season, people get out of the banks.

"There is no particular rhyme or reason to it, but everyone expects it and so it happens. It's self-fulfilling," she said.

The analyst doubted that portfolio managers are already taking profits to lock in their largest gains for the year, an activity that typically begins in November.

And she discounted concerns about credit quality. "There has been a gradual decline in credit quality, but it shouldn't have been unexpected," she said. "We reached the bottom of the credit cycle last year," with loan problems at low levels.

Nor does the banks' weakness appear related to interest rates. The bond market has remained unruffled this week.

To be sure, Ms. Blecher said, there have been some negative surprises recently.

Capital One Financial Corp., the much-touted credit card issuer, told analysts it expected slower growth because of credit quality concerns. And Norwest Corp. said loan growth would probably soon slow from the double- digit range to 6% or 8%.

Ms. Blecher reduced her Norwest rating in response to "long-term outperform" from "outperform." However, she said she expects the Minneapolis banking company's substantial nonbank activities to take up the slack.

In trading on Wednesday, Norwest stock was off 75 cents to $30.125. "Fundamentally this is still a very strong industry," she said. "If we have another large merger announced or a cut in rates, you will again see strength in the bank stock group."

But Lawrence W. Cohn of PaineWebber Inc. offered another view of the banks' sudden descent: "Gravity reasserts itself."

After their sizzling performance this year, "we have finally reached a point where the fundamentals intruded," he said. "And when the end comes, it comes with a thud."

"Every consumer lender in the country is under pressure," he said. "There is a very clear-cut deterioration in consumer credit quality, and the loss wave is finally making itself known."

Bank stocks this year spiraled upward further than anyone had expected because of a beneficial environment and intense takeover speculation, he said.

But now, he said, "there are those in the market who may be stepping back and saying, maybe our fondest dreams are not going to be realized," meaning expansion of banks' price-to-earnings multiples.

"There have been a lot of people in these stocks for no other reason except that they were going up," he said. "Those kinds of 'momentum players' are now on their way out."

In particular, Mr. Cohn said he thought the unsolicited $10 billion bid last week by Wells Fargo & Co. to buy First Interstate Bancorp "forced people to stop and think that it is possible to overpay" for another bank in an acquisition.

Last Wednesday, the day Wells disclosed its bid was the last day the American Banker index rose.

Indeed, the last few large deals in the industry and rumors of deals like BankAmerica merging with NationsBank Corp., denied by both banks, have had a sobering effect on the market, Mr. Cohn said.

Wednesday's downdraft in banking issues was so strong that it pulled down other stocks as well. Broad-market indexes were mostly lower.

Among banks, First Interstate, up over 30% last week on the Wells Fargo bid, skidded $10.50 to $120.50. Shares of Wells Fargo fell $12.25 to $207.25.

Among other big losers, NationsBank shares were off $3.50 to $65.875, First Chicago Corp. was down $2.50 to $68.375, and Bank of Boston was down $1.50 to $46.125.

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