Stocks: Despite Strong Earnings, Banks' Stocks Vacillate Amid Rate Hike

Bank stocks fluctuated on Monday despite a string of strong earnings reports.

The good results, combined with cheaper prices as a result of the recent selloff, lured some investors back to banks early in Monday's session, traders said. But anxieties about interest rates soon returned to dampen the enthusiasm.

"The volatility in the market is obviously extreme," said a trader who did not want to be named. "Even with the decent earnings, there is still a negative tone to these stocks," he said, "and there is still a bias that the Fed is going to raise rates again."

The Standard & Poor's bank index rose 0.86%, while the Dow Jones industrial average rose 0.94%. The S&P 500 was also up 0.82%; the Nasdaq bank index also was up 0.30%.

Although most bank stocks fell in Monday trading, there were a few gainers, including BankAmerica Corp, which rose $2.50, to $103.875; Citicorp, up $1.625, to $106.50; and J.P Morgan & Co., up $1.375, to $94.875.

Market sources warned that bank stocks could be hit by another significant decline if the government's latest reading of the consumer price index-set to come out today-hints at higher inflation.

Regional bank analyst Nancy A. Bush of Brown Brothers, Harriman & Co. also cautioned Monday that investors "might be nearing the worst and last of this bank stock correction."

Ms. Bush pointed out in a report that substantial declines last Friday in higher quality bank stocks, such as SunTrust Banks Inc. and Barnett Banks Inc., indicate "that some investors are deciding that even these companies do not offer a place to hide, and we think this worsening of sentiment indicates that the washout phase is coming."

Another analyst, Michael L. Mayo of UBS Securities, said investors are wrestling with the conflicting factors of favorable earnings and the prospects of higher rates. "We think that the negative psychology will give way to favorable earnings."

But veteran analyst Robert B. Albertson of Goldman, Sachs & Co. downplayed anxieties about higher interest rates and their possible impact on bank earnings.

He noted that NationsBank Corp. managers said during a conference call with analysts on Monday that a two percentage point rise in interest rates would be a "nonevent to their bottom line." Mr. Albertson expects similar sentiments from other banks.

Also optimistic is David H. Ellison, a portfolio manager who runs two financial funds at Friedman Billings & Ramsey & Co. He said bank stocks will soon bounce back. "I am much more excited than I was two months ago," said Mr. Ellison. "I think this period is setting us up for outperformance."

Mr. Ellison said the current correction in bank stocks is similar to one that occurred during late 1994-when rates spiraled, credit quality fell, and banks sold off between 20% and 40%. Shortly after that period, banks had one of their best runs, he said.

"It's all about earnings," asserted Mr. Ellison. "Earnings are everything. At the end of the day, if earnings are going to be respectable, then the stock prices are going to be fine."

Ms. Bush is also optimistic about earnings.

"The market will do what it's going to do," wrote Ms. Bush. "We continue to believe that there are values being created here, and we look to BankBoston, First Bank System, KeyCorp, and Norwest as names to track as the correction continues."

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