Stocks: Bank Shares Tumble As Hope Fades that Fed Will Cut Rates

Bank stocks fell across the board Thursday on concerns about credit quality and renewed doubt that the Federal Reserve will cut rates.

Notable bank stock losers included BankAmerica Corp., which fell $2.125 to $63.875; NationsBank Corp., which dropped $2.125 to $70.125; First Union Corp., which was off $2.25 to $55.75; and First Fidelity Bancorp., which was down $2.75 to $75.625.

The Standard & Poor's bank index was down 1.78%.

Credit card banks also fell, with First USA dropping $2.375 to $45.875, MBNA Corp. losing $2.125 to $37.125, and Capital One Financial dropping $1.375 to $23.50.

Until recently, analysts said investors had anticipated a decrease in the federal funds rate, but that scenario was cast in doubt by the producer price index release on Wednesday that came in higher than expected and by rising concerns over the unresolved budget battle in Washington.

"Some investors in the financial services area are having second thoughts about whether or not the Fed will ease," said Charles Vincent, a bank analyst with PNC Asset Management Group.

"The bank market already appears to have been pricing in a good part of any Fed easing over the next several months," said Sandy Flannigan, a bank analyst at Merrill Lynch. "Any type of concern that that might be delayed could dampen enthusiasm for bank stocks in the short run."

Analysts added that investors might also be concerned about consumer credit quality.

The bank market was alarmed by a rise in delinquencies at several finance companies in September, said Anthony Davis, a bank analyst with Dean Witter. "The market will be queasy until it believes the credit cycle won't destroy bank profitability."

Mr. Davis, however, is confident that bank earnings will hold up in spite of the anticipated tougher year in 1996.

Under a worst-case scenario for 1997, Mr. Davis is estimating a reduction in earnings of 3%, while he anticipates growth of 13% to 14% for the stocks he covers.

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J.P. Morgan & Co. raised its dividend 8% Wednesday, to 81 cents, and said it plans to buy back 3.5% of its shares.

The dividend increase was in line with expectations. The share buyback appears relatively small in comparison with those instituted at other banks.

While calling the buyback "disappointing," Stein Roe & Farnham analyst Stephen Berman said that it is consistent with Morgan's management of capital.

"They feel it's important to have a fortressed balance sheet," said Mr. Berman.

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Fox Pitt Kelton analyst Michael Granger, Salomon Brothers analyst Diane Glossman, and Brown Brothers Harriman analyst Nancy Bush upgraded Bank of Boston Corp. to a "buy," after the company announced a merger with cross- town rival BayBanks Inc.

The Bank of Boston was one of the notable gainers in the day, rising 37.5 cents to close at $44.

"By getting BayBanks, the Bank of Boston has substantially changed its image, which it had been trying to do for five years," said Mr. Granger.

Bank of Boston no longer looks like a money-center bank, he said. "It becomes a regional bank with a stronger consumer business and a Latin American operation which supplements the New England bank."

Ms. Bush expects that with the Bank of Boston's identity resolved, a more purely regional price-to-earnings multiple will result.

"Because BayBanks is a premier consumer financial company, the Bank of Boston is worth a higher multiple than what it was getting before," said Mr. Granger.

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