Major bank stocks put on a high-octane performance in the market last week, surging past other stocks on a wave of good news about the industry.
In the five trading days ended Thursday, the American Banker index of the largest publicly traded bank stocks gained 3.4%, versus the 2.6% gain in the Standard & Poor's 500 stock index.
The record $5.4 billion merger deal by First Union Corp. for First Fidelity Bancorp. and Citicorp's $3 billion stock repurchase program were key factors, as was the continuing slide in interest rates.
Still, some analysts do not think bank stocks are overpriced.
"Valuations in general are still reasonable, although not as compelling as they were," said Moshe A. Ohrenbuch of Sanford C. Bernstein & Co., New York.
Banks have performed well, he said, because "here we are at the middle of the year and bank earnings haven't fallen off a cliff. Many of the market's concerns about earnings have been mitigated."
That is in sharp contrast to the situation of year ago, Mr. Ohrenbuch said.
"In 1994, the banks were repositioning balance sheets for higher rates. They had good loan growth but not much net interest income growth," he said.
Now, with loan activity still strong, net interest income growth is making a comeback.
"It also helped that First Union pre-released better second-quarter numbers than some people were looking for," the analyst said.
The climate of falling rates, particularly long-term rates, has helped lift bank stocks across the board, said analyst Judah S. Kraushaar of Merrill Lynch & Co., New York.
But he cautioned that "we believe we are approaching the late stage of the broad movement in bank stocks."
If the Federal Reserve actually begins lowering short-term rates, he said, "that might be a good point for people to become a little more selective about banks."
Mr. Kraushaar suggested that large money-center banks might be a good place for investors right now because their stock prices have not climbed as high as regional and superregional banks.
His top recommendations are Chemical Banking Corp., J.P. Morgan & Co., and Republic New York Corp., followed by Citicorp and Chase Manhattan Corp.
Shares in InterContinental Bank, Miami, rose tktk to tktk Friday after the company disclosed negotiations to be acquired by NationsBank for $30 per share, or 2.18 times book value. Shares in Nationsbank fell $1.125 to $56.25.