Bank stocks may be losing some of their allure on Wall Street, even as strong earnings continue to roll in.
NationsBank Corp.'s record earnings report on Monday wasn't enough to tip the scales in favor of banks, which lost ground. And many of the stocks continued to fall back on Tuesday.
A few big banks that have had disappointing results are "putting pressure on the group," said Lawrence W. Cohn of Ryan, Beck & Co., West Orange, N.J.
Citicorp's earnings, announced Tuesday, "while on mark, are low- quality," bolstered with nonrecurring items, Mr. Cohn said. "People are paying attention to that."
Disappointments from Wells Fargo & Co. and Banc One Corp. added to investor's fears that bank stocks may be overvalued, Mr. Cohn said. "Those three are big flagship stocks that have gotten people modestly distressed."
Citicorp dropped $3.125, to $125.375, and Banc One slipped 18 cents, to $48.75. Wells Fargo, which was down $5 early on, gained $1.50, to end trading at $267.
The Standard & Poor's bank index was down 0.74 points to 558.78, a 0.13% loss, while the S&P 500 shook off early-day doldrums to end up 7.40, or 0.81%, at 925.78. The Dow Jones industrial average also climbed out of a hole, rising 52.73 points to 7,975.71.
While analysts remain cautiously upbeat about long-term prospects for bank stocks, a hint of the bear seems to lurk in the wings.
"Valuations feel full given the uncertainty regarding the earnings outlook," said bank analyst Catherine Murray of J.P. Morgan Securities. Though she said earnings have been "quite good" in general, "as you look forward, it's not clear what the earnings levels of banks will be."
If banks continue to perform strongly over the next few quarters, she said, valuations could move higher. "But right now there's too much anxiety."
"People are starting to question the momentum of earnings," said Frank Salvaterra, head trader, Sandler O'Neill & Partners. "Expectations might have gotten a little ahead" of the stocks, he said, but "unless the Fed makes a move (to raise interest rates), I don't see any serious correction in bank stocks."
On the other hand, Joseph Stieven of Stifel, Nicolaus & Co., St. Louis, had few if any reservations. Banks have "had such a great run, there may be profit taking" he said. But, "in the longer term, we feel very good about the group."
With most banks showing strong returns on equity and strong asset quality,"Why don't they deserve (comparable) market multiples?" asked Mr. Stieven. "They have better and better management teams guiding the companies, achieving better returns that anyone thought possible for bank stocks."
One example is Fifth Third Bancorp. of Cincinnati, "with two decades of record earnings," he noted. "Companies like that deserve huge multiples."
In fact, the market awards Fifth Third near-parity with stocks in general, with a price-earnings multiple of 26.6, but most banks trade at a 30% or greater discount to the market in general.
And in a vote of confidence despite its high price, Fifth Third was raised to "accumulate" from "neutral" by Fred Schultz at Olde Discount Corp. on Tuesday.
