Reflecting a remarkable bull run for stocks, the market capitalization of the top 100 banking companies rose by 45.5% in 1996.
Strong earnings growth compared to that of industrial companies in a modestly growing economy, and a particularly favorable interest rate environment in the year's second half, helped propel the stocks.
"The combination of positives for the banks was very powerful last year," said industry analyst Thomas D. McCandless of Natwest Securities, New York.
The aggregate value of the common stock of the 100 banking companies with the greatest market capitalization - a group that itself changes according to price movements and mergers - was $540 billion at Dec. 31, up $169 billion from the year before, according to data from SNL Securities. (See table on page 21.)
Looked at another way, the top banks piled up half again more value during 1996 than they had in total - $101.4 billion - six years ago amid the industry's worst credit crisis since the Great Depression.
Indeed, the banking industry leaders are riding an impressive two-year winning streak at the leading edge of Wall Street's bull market. Their impressive 1996 gain comes on top of the 52.7% increase in value tallied in 1995.
The top banks posted a 12.4% gain in the fourth quarter alone, making it the strongest period of the year. A fresh $40 billion of market value was racked up by the top 100 in the final three months of the year.
New York's Citicorp easily remained No. 1, sporting the stock with the largest capitalization. It posted a Dec. 31 market value of $48.5 billion after an extraordinary 69.5% appreciation in its stock price last year.
Some analysts said the huge gains for banks evinced a basic reassessment of the industry by investors.
"The bottom line is that there is a recognition that banks were not being properly valued by investors," said Richard X. Bove, the bank analyst at Raymond James & Associates Inc., St. Petersburg, Fla.
The most important shift in perception, he said, is that "the biggest banks in the country now have substantial advantages over the smaller banks in the way they run their businesses."
"First, they have access to funds in the worldwide market, and second, they are now the low-cost producers," he said. "They have 'factories' that are far more efficient than the smaller banks in manufacturing auto loans or savings deposits."
Another critical realization, Mr. Bove said, is that "it is possible to run a bank far less capital-intensively than was previously believed." Wells Fargo & Co., San Francisco, has been the leader in this regard, he said.
"Wells Fargo taught the banking industry to run itself so as to free up excess capital that can then be used to buy back stock," he said.
That approach means pruning and reorienting balance sheets to minimize growth that requires generating deposits. Reducing the need for deposits means not having to raise rates to attract funds, thus "maximizing the margin," Mr. Bove noted. That also means less dependence on expensive branch systems.
Finally, balance sheet management has been significantly advanced through securitization, the packaging and sale of loans. "That means you can now generate noninterest income instead of spread income," Mr. Bove said.
He said he expects bank stocks to have another good year but probably not as spectacular as the last two. "Another like the last two, three big ones in a row, is a tall order," he said.
Natwest's Mr. McCandless also said he thinks bank stocks are "due for a rest." That may happen, he said, because earnings comparisons with other sectors of the stock market this year will not be as good. He added that he expects a difficult rate environment in the first half of the year.
The top percentage gainer in market value during 1996 was Wells Fargo, which expanded its capitalization by 145.9% after its acquisition of First Interstate Bancorp. Fleet Financial Group was second, up 129%, and First Union Corp. third, up 115.1%.
Mirroring just what a sterling year 1996 was, there were no year-to-year market value declines among the top 100 banking companies. The worst performance was the 4.2% gain by Valley National Bancorp.
But in the fourth quarter, the biggest market capitalization gainers were United Carolina Bancshares, up 70.2%, and Union Planters Corp., up 51.1%, and Comerica Inc. was the weakest final-quarter performer, with a 4.9% decline.
