Bank Stocks Take a Dive As Market Gets Jittery

Banks endured a rocky day on Wall Street Friday, leading the markets in one of the biggest selloffs in weeks.

Investors, amid concerns that the economy is revving up and interest rates could rise, abandoned bank stocks in droves.

The battered sector took its cue from a falling bond market. Bank stocks were once again punished, even as industry analysts continue to insist that banks' earnings are no longer as sensitive to interest rates as in the past.

Money-center banks, many of which had soared earlier last week, went into a tailspin. Citicorp fell $2.50, to $134; Chase Manhattan Corp. lost $1.56, to $107.56; J.P. Morgan & Co. was off $2.54, to $110.68; and State Street Corp. dropped $2.875, to $52.25.

The trouble began Thursday when a Federal Reserve official in Kansas City hinted that July's consumer and producer price indexes, due next week, might show inflationary pressures. He warned a rate hike could be in the cards. As investors panicked, a Fed official made remarks in Florida to the contrary, restoring some confidence in late trading Friday.

Though banks led the deluge "the entire equity market is off," said analyst David Berry of Keefe, Bruyette & Woods Inc., New York. With all major stock indexes in the stratosphere, investors are nervous, he said. "A bad day on the bond market and there's a rush for the door."

Indeed the Dow Jones industrial average surrendered more than 200 points in early trading, ending the day down 156.78 points to 8,031.22. The Standard & Poor's 500 broad-market index fell 17.65, to 933.54.

But bank stocks took the biggest bath, with the S&P bank index falling more than 3% at one point, recovering slightly to end trading off 15.50 points, or 2.56% lower, to 574.21.

The yield on the benchmark 30-year Treasury bond rose 11 basis points, to 6.64%. Just over a week ago the long-bond yield had dropped to 6.30%.

Mr. Berry contended the free fall was broad based, driven by larger economic issues as opposed to individual company news or developments. "Bank fundamentals are still great," he said. "But with the Dow Jones going straight up for months, it's not strange that there would be profit taking."

Even so, "if we stay in a world of good growth and low inflation, experience shows you should buy on the dips," said Mr. Berry. But he acknowledged, "It's easy to imagine more of a dip before we're done."

Despite Friday's action, Mr. Berry upgraded Bank of New York Co. to "market performer" from "underperformer" on news that it might sell its credit card portfolio to Chase Manhattan Corp. That didn't help its stock price, which fell $1.375, to $45.875.

Thrift analyst Thomas O'Donnell of Smith Barney, said the best performers in his group took the hardest hits on the day.

Washington Mutual Inc. gave up $3.78, to $64.18. Ahmanson Corp. slipped $1.31, to $49.68, and Sallie Mae dropped $3.375, to $141.31.

Elsewhere, CoreStates Financial Corp. attracted more unfavorable notices from the investment community. The resignation of its president Rosemarie Greco last Monday, prompted a less-than-favorable report from Merrill Lynch's Judah S. Kraushaar, who maintained his "neutral" rating.

Mr. Kraushaar said he expects "stepped up takeover speculation." He said in the bank's "shares are fully valued on a fundamental basis, yet the franchise could be of interest to a number of suitors."

Dillon Read's Anthony R. Davis, a self-proclaimed "long-suffering ally" of the Philadelphia bank, cut CoreStates to "neutral" from "outperform," after five consecutive quarters of earnings disappointments. He expects retail account attrition of 15% in 1998, and another possible round of restructuring charges to further hurt the bank. The stock fell 68 cents, to $61.50.

"Earnings for the typical bank should be up 15%, but CoreStates will struggle for 8% or 9%," he said. Mr. Davis lowered his earnings per share estimate for 1998 by 10 cents, to $4.30, but indicated it could fall further.

CoreStates stumbled in handling its merger with Meridian Bancorp in 1995. Its reengineering program-internally tagged Best, for Building Exceptional Service Together-resulted in the departure of 4,000 employees, low morale, customer attrition, and hampered revenue growth, said Mr. Davis.

He suggested Banc One Corp. might have an appetite for a such a large acquisition. CoreStates, with market capitalization of $13 billion, could go for $15 billion with the premium, he said.

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