Bank Shares' Good Times Ended During June, Most Analysts Say
Banking shares left the rest of the stock market in the dust during the first half of 1991, though renewed jitters about borrowers' credit quality exacted a toll in June.
The American Banker index of the 225 largest publicly traded banking firms, prepared by SNL Securities, gained 31.79% since Jan. 1. In contrast, the Standard & Poor's 500 stock index rose 12.40%, and the Dow Jones industrial average gained 10.37%.
Fuel Tank Empty
But the big rally that began last October and gathered force early in the year has run out of gas. The banks gave back 5.18% during June and had a particularly bad outing last week, falling 4.07%.
Moreover, the rally ended without regaining all the ground lost during the preceding 12 months. In the first half of last year, the bank stocks lost 6.53% in value while the S&P 500 gained 1.3%. Big banks' shares were en route to a dramatic, 25% overall erosion in value for all of 1990 when investors sensed an undervalued situation.
"The low base from which most of the banks lifted off was the key to their performance in the first half. It was the recovery phase for these stocks and now looks to have largely run its course," said Frank J. Barkocy, senior vice president for financial institutions at Advest Inc.
In fact, according to the American Banker index, bank stocks peaked nearly a month ago, June 5. And at its most recent high point, the index was still nearly 10% below its peak of October 1989.
Some Banks in Orbit
Still, some banks tallied stratospheric gains. Fleet/Norstar Financial Group Inc., Providence, R.I., buoyed by its winning bid for the failed. Bank of New England, rocketed 101% - the biggest rise among the nation's 50 largest banks.
Rounding out the top five performers were Chemical Banking Corp., New York, which spurted 98.8%; UJB Financial Corp., Princeton, N.J., 71.9%; PNC Financial Corp., Pittsburgh, 67%; and Meridian Bancorp, based in Reading, Pa., 56%.
Among banks below the level of the top 50, shares of Valley National Corp., Phoenix, which has been recovering from serious real estate-related difficulties, soared 110.3% in the first half.
Even well-regarded banks whose shares fell relatively less than others in last year's blood-bath did better than the market in the first half of this year. U.S. Bancorp., Portland, Ore., was up 48.1%; Banc One Corp., Columbus, Ohio, gained 37.8%, and State Street Boston Corp. rose 28.3%.
Beating Market Indexes
In fact, 40 of the largest 50 banks, as measured by assets, topped the returns of both the S&P 500 and Dow industrials, an unusual feat in any industry sector, analysts said.
At the other end of the spectrum were two troubled institutions. Houston's First City Bancorp surrendered 54% of its value in the first half, and Miami's Southeast Banking Corp. tumbled 48.7%.
Shawmut National Corp., with headquarters in Hartford, Conn. and Boston, was the other bank among the top 50 to lose ground, falling 5%.
One major banking company, Midlantic Corp., Edison, N.J., posted neither gain nor loss. Its shares finished the first half of the year just as they began it, priced at $5.
The worst-performing moneycenter bank stock was New York's Manufacturers Hanover Corp. Its shares finished 1990 at $21.125 and closed the first half of 1991 at $21.62, inching forward only 2.37%.
Overall, the prospects for bank stocks in the second half of the year are expected by investment professionals to be far less dramatic than were the first half's strong moves.
"I think they are going to underperform the market," said Philip Dubuque, portfolio manager for Strategic Financial Services Portfolio, a mutual fund based in Denver, Colo. "The record of the last four or five recessions shows they do at this point in the economic cycle.
"And these stocks don't just underperform for a few weeks; they really do move with the cycle over a longer period of time," Mr. Dubuque added. "Historically, the outperformance part of the cycle we have just seen lasts about four months, but this time it continued for seven months because the stocks were coming off such low bases."
"A lot will depend on the economy, since banks are still the barometers of the economy," said Frank W. Anderson, banking analyst for Stephens Inc., Little Rock, Ark.
"Lately, we've seen nervousness in the market," he said. Problem loans at banks are usually a lagging economic indicator and don't peak until six months after the end of a recession, "but real estate is a nationwide problem and no place is immune."
Mr. Anderson also said he sees "no big engine to pull us out of recession." He grants the possibility that the economy could recover for several quarters but then slip back into recession, the much-debated "double dip" syndrome.
"Some of the confidence that analysts and investors developed earlier in the first half of the year has recently eroded," said Mr. Barkocy of Advest.
Among other things, he said, the loss-reserve increase announced last week by Wells Fargo & Co. was a reminder that "the regulatory climate is still fairly aggressive in forcing recognition of problem assets."
As a result, he said, the feeling has set in that, "If we do see surprises in the second-quarter results, they will more likely be negative than positive, and this is taking the wind out of the sails of group."
Mr. Barkocy said he expects "a shakeout in coming weeks and then the start of a more selective process in the market that will favor strongly capitalized banks not tainted by any further flareups in problem assets." The institutions could begin moving "to a higher-multiple plateau" as the year winds down, he said.