Last week's selloff marked the beginning of a slow period for bank stocks that could last several months, analysts said.
Federal Reserve Chairman Alan Greenspan's congressional testimony Tuesday, in which he suggested that the stock market is overinflated and that the Fed may raise rates to head off inflation, could depress bank stocks until the central bank acts-probably in May, according to most observers.
On Friday bank stocks suffered a third consecutive day of losses. Chase Manhattan Corp. shares fell 75 cents, to $100.125; Citicorp slid $2.625, to $116.75; BankAmerica Corp. dropped $2.25, to $113.65; and J.P. Morgan & Co. fell $2.12, to $105.
Fleet Financial was the notable exception: Its stock rose $1.50, to $61, on takeover speculation.
Analysts were not surprised or alarmed by the prospect of a cooling-off period.
"I don't think the correction has been complete, and things will continue to be volatile for a while," said Marshall Acuff, chief investment officer at Smith Barney. "These things take a while to work themselves out, but the pullback will be an opportunity to buy," he said.
Analyst Thomas McCandless of Natwest Securities said that he expects bank stocks to lag the market by 5% to 10% for the next three to six months.
January's flurry of merger activity spilled speculation into stocks and pumped up their prices, but now a slump in bank stocks that started in December has resumed its course, Mr. McCandless said.
Observers have been expecting banks to retreat from their run-up for quite some time, and some even said that Mr. Greenspan's comments were merely an excuse for investors to take the tremendous profits they've made in the sector.
"It's unlikely that the market could continue to rise at that rate," said Mr. Acuff. "Even if Greenspan had said nothing, the sector would have entered a consolidating period."
Analyst James M. Schutz of ABN Amro/Chicago Corp. said investors were "looking over their shoulders and trying to figure out when to hit the exit."
Anthony Conroy, head of trading at Bankers Trust New York Corp., said the downturn in bank stocks wasn't especially worrisome. "We're in a trading range in a liquidity-driven market," he said. "Everything is fundamentally sound, and the stocks are reaching a point nowhere close to where we were in 1987."
Mr. Schutz added that banks are "positively gapped," meaning that their assets reprice faster than their liabilities, and that if the discount rate goes up, banks wouldn't be hurt as badly as they would have been in the past.
"This is a healthy thing, because the stocks were getting ahead of themselves," said Mr. Acuff. "Now the stocks will begin to come back to trend lines, and better balance against their fundamentals."
Mr. McCandless agreed that "there are a lot of very strong fundamentals in play that would prevent any major downside. A 10% correction could be a healthy foundation for an enduring rally on the other side."
Separately, Bank of Boston Corp. announced Friday that it would repurchase up to 8% of its common stock. Crestar also announced a buyback of two million of its shares.
Also, NationsBank's stock split took effect at the end of the day. The 2-for-1 split will make the stock, which had reached $125 per share in intraday trading, more affordable to retail investors.