Redemption sales by some investment funds this summer exacerbated the market's negative view of bank shares, which already had been hurt by rising rates and merger-related concerns.
Now some fund managers see both buying opportunities and bright spots ahead.
"I haven't heard anything positive about the industry recently, which makes me think that things are overdone," said Richard I. Sichel, executive vice president and chief investment officer at Philadelphia Trust Co.
"Everybody is jumping on the bank bear bandwagon and counting them out forever," said Daniel G. Bandi, vice president of National City Investment Management Co. in Cleveland. "Nobody can see what will bring them back. Sentiment has gone far enough to create opportunities."
Banks have indeed been clobbered since the Federal Reserve began raising rates on June 30. While the broad-market Standard & Poor's 500 index has slipped 4% since then and remains ahead 7% for the year, the S&P bank index has tumbled 13% and is down 7% in 1999.
Besides rate fears, negative news arising from acquisitions by two leading superregional banks, First Union Corp. and Bank One Corp., have seriously undermined market sentiment. Some investment funds that had zeroed in on banks when they were hot properties, particularly from 1996 onward, have lately been selling to satisfy heavy redemption demands.
"We need a different environment, but it isn't going to happen until redemptions slow down," said Miles P.H. Seifert, chief investment officer at Gray, Seifert & Co. in New York, a unit of Legg Mason Inc. that manages about $1.5 billion of funds and has stakes in more than 50 midcap banks on behalf of clients.
Mr. Sichel and Mr. Bandi have both been sellers of First Union and Bank One, whose stocks have plummeted this year, but they have also been buyers. Mr. Sichel has added to positions in both Citigroup Inc., which he describes as "a mutual fund of financial services," and Mellon Bank Corp. He also owns stakes in Bank of America Corp. and Chase Manhattan Corp.
As Mr. Sichel sees it, bank earnings "will continue to come through, although they will not be quite as robust as they have been. And I think rates and inflation are headed lower, not higher, over the next six to 12 months, which should help this group. It is a good, clean industry that is being overlooked at this point."
He said he anticipates banks will be helped by a period of stable to lower rates after the Fed's next monetary policy meeting, Oct. 5. Then, after concerns about year-2000 computer problems are resolved at yearend, a pickup in merger activity in late winter or spring "could give these stocks a shot in the arm."
Philadelphia Trust, which opened its doors in April, is an investment management firm with banking and trust powers and has about $200 million under management. Mr. Sichel arrived several months ago from the Bryn Mawr Trust Co.
Mr. Bandi, who selects financial stocks for National City's Armada Equity Income Fund and manages several other funds, has been taking advantage of depressed prices to establish or augment positions in several banks. Indeed, he said he was underweighted in banks stocks earlier this year but is now at nearly an equal portfolio weighting for banks versus other market sectors.
"As prices have come down, we have picked up some of the stocks, but it has been mostly based on valuation," he said. "We don't see anything next quarter to get stocks moving." He has picked up shares in Comerica Inc. of Detroit, whose share price had previously been too high to fit National City's value-based investment parameters.
He has also acquired a stake in SouthTrust Corp. of Birmingham, Ala. "The economy down there just seems to continue to do well," he said, "and they have posted upside surprises on results, but the stock has been dragged down with everybody else."
In addition, he has picked up shares in Unionbancal Corp. of San Francisco, which is majority-owned by Bank of Tokyo-Mitsubishi Ltd. "It's one of the few low-hanging fruit, easy-cost-save stories left in banking," he said. "The bank has some fat that can be easily trimmed off, and management seems interested in doing that now. Plus, it trades at a pretty good discount to peers."
But Mr. Bandi and others said they doubt that bank stocks will soon return to the halcyon days of 1995-1997, when earnings surged and mergers multiplied as stock prices rocketed upward to produce huge returns for investors.
"Those 50% returns spoiled a lot of people," said Mr. Seifert. They also attracted many new investors to banks via a flock of new funds. Now, some of those funds, whose asset bases jumped rapidly as the stocks soared, face an unwinding process as redemptions dictate stock sales.
As for banks themselves, Mr. Bandi sees "some temporary factors hurting them and some longer-term challenges."
The biggest temporary factor is the prospect of another Fed rate hike in October, succeeding the increases in June and August. "I'm probably one of the few people who would like to see the Fed raise rates in October," he said "It would clear the air and allow everyone to get back to business."
A move by the Fed, or a signal that further upward rate moves are not ahead, coupled with good third-quarter earnings "should take some pressure off these stocks," Mr. Bandi said.
In the longer term, however, the industry's revenue growth challenge looms, he said. "The banks have been trying to resolve the issue through mergers, with cost-cutting, but the easiest part of this has been accomplished, and many banks still remain at a point where it takes more than a dollar in expenses to produce a dollar in revenues."
"This is a long-range challenge for the industry," he said. "But current valuations discount that, and more.'' Indeed, major regional banks are trading at about 13 times next year's estimated earnings and 15 times trailing earnings. That puts them at a bargain-basement 60% of the overall market's price-to-earnings multiple.