Shares of Bank of New York Corp. and Mellon Financial Corp. flirted with their 52-week highs Thursday as investors bought shares of financial companies seen as less vulnerable to rising interest rates.
The stocks of both companies came within a hair's breadth of their 52-week highs during a powerful rally in the financial sector that was set off by favorable government data suggesting that the economy was slowing down.
The American Banker index of the 50 largest banks rose 2.84%; while its 225-bank index rose 3.90%.
Despite the euphoria in the sector, many bank stocks failed to even come close to their 52-week highs.
Bank of New York's 52-week high is $48.1875; it closed at $47.9375, up $1. Mellon's 52-week high is $39.875; it closed at $39.625, also up a dollar.
Shares of Bank of New York, Mellon, State Street Corp., and Northern Trust Corp. have performed much better than other banks' because their revenues - which are primarily derived from fees - are less vulnerable to rising interest rates. The Federal Reserve has raised interest rates six times since last summer, which has put pressure on many banks' margins.
These four banks rely heavily on processing, trusts operations, mutual funds, and other capital markets operations, said Kevin Timmons, an analyst at First Albany Corp. "These businesses are higher growth and are perceived as better quality," said Mr. Timmons. "Many banks are estimated to have mid-single-digit growth, Bank of New York and others like it will have twice that level."
Mr. Timmons said that, on average Bank of New York, Mellon, State Street, and Northern Trust delivered 11.8% operating revenue growth year over year for the first quarter. The average large bank delivered about 6%, he said.
These banks have put themselves in a good position, Mr. Timmons said.
"Capital-markets activity is much more intense now than it was 20 years ago," he said. "More people are investing, and with the aging population it will continue to be that way. Furthermore, capital markets are opening up all over the world. The continuation of these trends will only benefit these companies."
And there is likely to be little competition from others, because start-up costs are huge and the companies that are already in these businesses have been in them for a long time, Mr. Timmons added.
Still, shares of State Street and Northern Trust did not match Bank of New York's and Mellon's Thursday. State Street's shares actually fell $3, or 2.69%, to $108.50. Northern Trust closed up $2, or 3.04%, at $67.8125; its 52-week high is $73.3125.
Shares of State Street and Northern Trust, however, had gained in January and March when other bank stocks were falling, said Gerard Cassidy, an analyst at Tucker Anthony Cleary Gull.
During that period the American Banker top-50 index fell 0.08% and the 225-bank index 4.6%, while State Street and Northern Trust shares gained 38.8% and 33.8%.
"Investors are looking at their high multiples and realizing that they can make more gains on an incremental basis by switching into lower-multiple banks such as Bank of New York and Mellon," Mr. Cassidy said. "Their businesses are not exactly the same, but they are similar, and an investor can pay a much lower multiple."
