Bank Stocks Surge in Moderately Rising Market

Bank stocks sharply outpaced the rest of the market Monday.

The banks were buoyed, apparently by rising bond prices and by benign comments that Federal Reserve Chairman Alan Greenspan made in a speech Friday night at Stanford University's Center for Economic Policy Research.

Still, some analysts were puzzled by Monday's strong showing.

The Standard & Poor's bank index rose 10.26 points, or 1.76%, to 593.64, handily outperforming the S&P 500 broad market index, which rose 2.15 points, or 0.23%, to 931.20. The Dow Jones industrial average gained a mere 12.77 points, or 0.16%, closing at 7,835.18.

David S. Berry, research director at Keefe Bruyette & Woods Inc., offered some explanations.

He agreed that Mr. Greenspan's comments at Stanford likely signaled there will be no rise in interest rates at the Federal Open Market Committee's next meeting, set for Sept. 30. That surely cheered investors but probably not enough for the dramatic rise in bank stocks on the day.

Mr. Berry suggested that some of the momentum may also be due to the continuing impact of NationsBank Corp.'s big buyout price for Barnett Banks Inc.-four times book value-in a $15.5 billion deal unveiled Aug. 29.

The analyst also cited upbeat remarks in The Wall Street Journal by Pittsburgh money manager Ron Muhlenkamp, who thinks bank stock valuations ought to move higher. That suggests the general investment community is adopting the views of industry insiders.

Bank stocks as a group still trade at a discount to the market-at about 70% of the valuations of other sectors. Many analysts assert that banks deserve better because their performance has improved since the calamities of the late 1980s.

More specifically, banks are turning in higher earnings growth and more solid balance sheets than in recent history. In addition, they have become less sensitive to interest rate fluctuations.

Although the banks tallied solid gains Monday, economist Scott Brown of Raymond James & Associates, said Mr. Greenspan's comments indicated the Fed is "still on red alert, waiting for signs that inflation will take root." He said a rate hike in November remains likely in the face of continuing strong growth of the economy and possible inflationary pressures.

Also Monday, Greater Bay Bancorp. of Palo Alto, Calif., agreed to buy Peninsula Bank of Commerce. Greater Bay shares had gained 8.7% Friday in anticipation of the move and continued their upward momentum Monday. The stock closed up 75 cents, at $38.25.

The combined entity will have $867 million of assets and will serve the San Francisco peninsula area, including the lucrative Silicon Valley. The banks said the deal would be accretive to 1998 earnings.

In a pooling of interests transaction, holders of Peninsula Bank will receive 1.2 shares of Greater Bay.

Elsehwere in the market, Carnegie Bancorp of Princeton, N.J., was cut to "hold" from "buy" by analyst Claire M. Percarpio of Janney Montgomery Scott, mainly on price. The bank's shares dropped 75 cents, to $21.50.

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