Bank stocks will be off and running again next year, according to a highly bullish investor who regards the industry as "the new growth sector."
Robert A. Bonelli, who manages the Ernst Bank Equity Fund, said the only major risk to the stocks is "an overactive economy" and higher interest rates. He thinks the risk is small and apparently so does the Federal Reserve, which left rates unchanged on Tuesday.
The Fed's inactivity at its final monetary policy session of the year had been expected by Wall Street. The central bank will review business conditions again in early February.
Mr. Bonelli's upbeat contention that banks now qualify as growth stocks is based on his belief that many banks are now capable of a "sustainable earnings growth rate" between 15% and 25% annually.
Such rates "challenge the growth rates of many impressive industrial firms in the Standard & Poor's 500," he said. But the S&P historically sells at 14 to 18 times earnings, while banks typically trade at 60% to 65% of that level.
Mr. Bonelli, whose New York-based fund is up 27% in value so far this year, thinks it is reasonable these days for banks to sell at from 80% to 85% of the S&P, which implies a price gain of 15% to 20% over current levels.
His case for upward revaluation is based on the notion that banks are better managed, better capitalized and have made major progress in developing profitable fee-based business lines.
"Most of the larger regional commercial banks and money-center banks are now enjoying revenues that are more than 50% fee based," he said. "This level is up from less than 25% only a few years ago."
Meanwhile, "loan loss reserves have moved from 1% of total loans and 75% of problem loans in 1989 to 2% of total loans and over 200% of problem loans in 1996," he noted. In addition, the equity-to-assets ratio across the industry is now over 8%, with many dividend increases and stock repurchase programs being generated as a result.
Mr. Bonelli thinks the banking companies with the greatest potential for higher stock prices based on increased fundamental valuations are Chase Manhattan Corp., KeyCorp, and PNC Bank Corp.
He also likes a number of candidates for industry consolidation, including Mercantile Bancorp., St. Louis; National City Corp., Cleveland; and Summit Bancorp, Princeton, N.J. Mr. Bonelli once worked for UJB Financial Corp., a predecessor of Summit.
Among thrift institutions, he likes H.F. Ahmanson & Co. and Great Western Financial. "Both have excellent franchise values and strong balance sheets," he said.