Bank stocks continued their rise Tuesday-propelled not by earnings trends but rather by interest rate expectations.
For the past week or so investors have been bidding up bank share prices. The Standard & Poor's bank stock index rose 7% last week and another one-third of a percentage point on Tuesday.
That upbeat performance was a mirror image of the decline that occurred between May 13 and June 11.
The connection with interest rates is clear: When the market expects rates to rise, it sells off banks. Falling rates attract buyers.
But rate trends often fail to predict how profitable a bank will be, a fact that the market doesn't seem to get.
"Modest rate changes have little effect on earnings," said bank analyst Thomas F. Theurkauf of Keefe, Bruyette & Woods Inc. "Banks over the last decade or two have made great strides in terms of asset and liability management."
Bank One Corp. is a case in point. On May 13 it was at $63.125 a share. The next day the government announced a 0.7% rise in the consumer price index for April, which prompted expectations of a short-term interest rate hike by the Federal Reserve.
Bank One shares plunged 15% in the four weeks ended June 11, then started inching back upward.
Topping off the upswing was last week's 0.25% increase in the federal funds rate and signals from the central bank that its rate-increasing bias was turning toward neutrality.
On Tuesday, Bank One fell 12.5 cents, to $60.75, still 3.8% shy of its May 13 starting point.
Though such swings have come to be expected, often they do not seem justified by rate-related realities.
Banking companies routinely include rate-change scenarios in their quarterly earnings filings with the Securities and Exchange Commission, as required by law. But few investors seem to pay attention.
In its first-quarter SEC disclosure, Bank One estimated that its earnings would drop 1.4% over a 12-month period if interest rates rose 100 basis points overnight, and that its earnings would rise 1.2% if rates fell 100 basis points.
Most investors expected the Fed to raise rates by 0.25%, which it did, or by 0.50% at the most. Yet the stock took a drubbing.
"As rates move up, good things and bad things happen and they roughly cancel each other out," said Robert Strickler, a Bank of America spokesman.
Also, banks have diversified their income sources in recent years, particularly in the fees they charge to customers, making them less vulnerable to rate changes.
Although Bank One's stock-price swings were more dramatic than most, other issues performed similarly. In the four-week period from May 13 to June 10, just before the banks started to recover, the Standard & Poor's bank index lost 10% of its value. The Dow Jones industrial average declined 4.6% in that period.
"There is a perception in the investor marketplace as interest rates move up, the banks are disadvantaged," said Bank of America's Mr. Strickler. "Because of the use of derivatives and other hedging techniques, we are much less sensitive to interest rates than we used to be."
David Littman, chief economist of Comerica Inc. in Detroit said banks try to position themselves neutrally. "To do otherwise is a one-way ticket to oblivion."
