Bank Stocks Regain Some Ground; Price/Earnings Trend Favorable

Bank stocks rebounded a bit better than the rest of the stock market Wednesday, and an analysis of price/earnings multiples indicated that even after Tuesday's declines some of the biggest banks are in much better shape than they were historically.

The average P/E of banks in Keefe, Bruyette & Woods Inc.'s index on Wednesday was 15.8, substantially above the 10.76 of five years ago.

Banks on average now trade at 70% of the S&P 500's P/E ratio. Credit Suisse First Boston analyst Michael L. Mayo said that is well above the 58% of three to four years ago-but still below the 85% to 90% of three decades ago.

At the end of trading Wednesday, the Standard & Poor's bank index had risen 1.86%. Meanwhile, the Dow Jones industrial average advanced 0.70% and the S&P 500 0.87%. The Nasdaq bank index fell 0.90%.

Some hardy investors scoured wreckage from Tuesday's selloff, looking for bargains. Others stayed on the sidelines, convinced that banks, as with the general market, remain overvalued.

Mr. Mayo conceded there has been some "excessive exuberance" among bank stock investors. Three to four weeks ago he downgraded Citicorp, Chase Manhattan Corp. Banc One Corp., First Chicago NBD Corp., SunTrust Banks Inc., and Crestar Financial Corp.

"Investors did not factor in all the potential risks," the analyst said. "It is important that valuations reflect all the known risks and that investors recognize those risks as well."

Some market observers also believe the decline in bank stocks is far from over, despite Wednesday's comeback.

At midday, traders said they were receiving orders from few "vanilla" clients, as traditional buyers are sometimes referred to. The strength in the market, said one trader, was really being fueled by short-sellers who were active after their winning day on Tuesday.

"The bottom line is that we are not getting a bounce in banks," said the trader. "Banks led the selloff (Tuesday). This is the most skittish I have seen the market" in 10 years.

Wednesday's session was helped by pronouncements from market authority Abby Joseph Cohen of Goldman, Sachs & Co., whose bullishness was undiminished.

Scott Edgar, research director at the SIFE Fund, said "a lot of people are hoping that we continue to sell off. That way we get it over and done with." Wednesday saw "a recovery, but it is not an enthusiastic recovery."

Mr. Edgar said banks came back modestly because investors viewd the general market as overvalued. Bank sold off when investors were "throwing out the baby with the bathwater."

Market observers were notably cautious in assessing when and how bank stocks would fully recover.

"Bank stocks got the crap beaten out them" Tuesday, said analyst Frank J. Barkocy of Josephthal & Co. At Wednesday's opening he said, "I don't have much conviction about whether they will fall or rise today."

More sanguine was Dale Jacobs who heads a financial hedge fund.

"The market is driven by technical issues that will reverse themselves," said Mr. Jacobs of Financial Investors Inc. "We will get back to a market driven by value analysis."

He said he was "doing some nibbling here and there," looking to snap up more bargains before the bank prices begin to rise again.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER