Bank stocks bounced back Monday from last week's broad downturn as investors looked for companies with value and predictable earnings that were unjustly dragged down by profit warnings Thursday and Friday from Wachovia Corp. and Unionbancal Corp.
Though analysts said the rebound that sent the American Banker index up 3% was unlikely to begin a sustained rally, some were recommending companies with diversified earnings less tied to commercial lending. Bank stocks were hit hard after Wachovia and Unionbancal - which is mostly owned by Bank of Tokyo-Mitsubishi Ltd. - said they were boosting their reserves against bad loans.
On Monday the big winners were Northern Trust Corp., up 8.04% to 67.18, and Fifth Third Bancorp, up 5.91 to 63.39. Banks such as Northern Trust, which emphasizes fee businesses, are "go-to stocks" when other banks appear to be performing poorly, said Marni Pont O'Doherty, an analyst at Keefe, Bruyette & Woods Inc. in New York.
Fifth Third's focus on consumer lending is likely to help it maintain profitability, said Jennifer Thompson, an analyst at Putnam Lovell in New York, who reiterated a buy recommendation on the stock.
Other analysts pointed to State Street Corp. as another company whose business is less tied to commercial loans and Chase Manhattan Corp., FleetBoston Financial Corp. and Citigroup Inc. as ones with a diversified earnings stream. Credit card companies also look good in the near term, because retail borrowing appears to remain strong, said Ms. Pont O'Doherty.
State Street gained 1.34% to 104.125; Chase 3.44% to 47; Fleet 5.19% to 38; and Citigroup 2.29% to 64.125.
But despite the rebound, analysts remained bearish on the sector for the long term, saying that banks are still likely to face sagging earnings in the near future. Weaknesses in the economy and slowing demand for loans will be among the mains reasons, said Catherine Murray, an analyst at J.P. Morgan Securities in New York.
Monday's rally "is not sustainable," said David Stumpf of A.G. Edwards & Sons.
Some value investors may have determined that the selloff was too extreme, and decided to step back into the market, said David West, an analyst at Davenport and Co. in Richmond, Virginia.
Banks will remain a troubled sector for some time, Mr. Stumpf said. Earnings estimates are likely to be adjusted downward for declining reserve ratios, weakness in economy, and rises in nonperforming loans, he said.
"Last week's selloff reflected a nervousness I thought was appropriate" in bank stocks, Ms. Pont O'Doherty added.
First Union Corp. shares gained 8.01% to 29.5, helped by continued rumors that the bank is considering selling Money Store. The bank has revealed that such a move is under "strategic review," with some decision likely to be announced later in the month, Ms. Pont O'Doherty said.