Stocks: Bank Stocks Trail the Market On Second Record-Setting Day

Bank stocks appear to be settling for no better than the bronze medal in 1998's first market rally.

Ongoing concerns about a flat yield curve and financial predicaments in Asia are keeping financial institutions in the middle of the pack as leading market indexes climbed to record highs on Tuesday and Wednesday.

In fact, a bank was responsible for blunting the market's advance on Wednesday. After J.P. Morgan & Co., a component of the Dow Jones industrial average, fell 6.25 cents, to $111.4375, the widely watched Dow ended the day at 8,315.55, up 18.94 points.

Banks "are not performing well relative to the rest of the market," said John MacNeil, equity strategist with Salmon Smith Barney. "They are lagging, but not necessarily for a good reason."

In fact, one rationale for banks' recent slow down may be that they outperformed other stocks last month.

Now large-cap and many technology stocks are up "on relief" that fourth- quarter earnings were solid, Mr. MacNeil said.

Banks on Wednesday did perform in line with broader markets, which had far smaller gains than on Tuesday. The Standard & Poor's bank index was up 0.32% and the Dow Jones industrial average 0.23%. The Nasdaq bank index increased 0.15% and the S&P 500 0.10%.

But bank stocks can expect a "choppy" performance, at least near-term, due to several nagging worries, Mr. MacNeil said.

"You've still got plenty of concerns coming out of Asia" and large banks, because of their heavy involvement in the region, are seen as especially vulnerable, he said.

Additionally, thrifts and regional institutions remain subject to flagging profits because of the flat yield curve, said Ross A. Demmerle at McDonald & Co., Cleveland.

Still, the challenges are hardly insurmountable, several analysts said.

Frank J. Barkocy at Josephthal & Co. expects banks to soon be keeping pace with other stocks and said that shares of some financial institutions will spurt ahead of the market.

The reasons? Banks remain in extremely solid shape and investors like that security, Mr. Barkocy said. Also, the banking industry continues undergoing consolidation and that activity "can serve as a wave of appreciation" for share prices, he said.

Mr. Barkocy likes Hibernia Corp., down 25 cents, to $19.9375; Hubco, up 50 cents, to $36.75; and, among larger, acquisitive banks First Union Corp., which lost 6.25 cents, to $50.

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