Expecting strong gains in third-quarter bank earnings, investors last week gave bank shares one of their biggest weeks this year.

In the five trading days that ended last Thursday, the Amerian Banker index of bank stocks rose 2.2%. In contrast, the Dow Jones industrial average fell 1.5%.

"From this point, bank stocks can gain another 20% before the end of the year," said Robert Bonelli, executive director of the Ernst Financial Group in New York.

"This is a sector capable of sustainable earnings growth. the dividends are incredible, and the price-earnings valuations are relatively low." he said.

Flattering Comparisons

Money managers remain concerned about banks' revenue growth and the possibility that net interest margins may shrink. But overriding those worries is the belief that other sectors are not faring as well in a nearly moribund economy.

"Banks look pretty go to other sectors," said Richard like, a money manager with Chancellor Capital Management in New York, which focuses on growth stocks. "We'd rather buy, more technology, health care. or drug companies, but those areas are disappointing."

John Leonard, an analyst with Salomon Brothers Inc., said he expects banks' earnings prospects to keep the shares outperforming the overall market. One reason is that Salomon Brothers believes the general market is richly priced and may have difficulty making much progress for the rest of the year.

SunTrust Leads Rally

The biggest gains for bank shares last week came on Thursday, when the American Banker index rose 1.7%, versus a flat Dow Jones industrial average. Bank stocks continued to rise on Friday, led by J.P. Morgan & Co., which gained $1.375 to $79. Shares of Bankers Trust New York Co., jumped $1.75 to $83.25. The usually quiet shares of SunTrust Banks Inc., gained $2.125 to $43.875. The Dow Jones industrial average soared 32.14 points, to 3,621.63.

Last week's torrid buying pushed the American Banker index's gain to 11.7% for the year.

Money-center banks and superregionals paced the group last week. These banks have the biggest market capitalizations, and the price gains are a sign that institutional investors are buying shares.

Attractive Dividends

In addition, some of these banks have dividend yields north of 3%, an attractive feature in a low-rate environment.

Mr. Leonard said that for the five trading days ended last Thursday, his money-center index was up 3.6%. His superregional index gained 2.6%, while regionals were fiat. Investors are shying away from regionals because these are perceived as the most likely to make an overpriced acquisition.

The hottest stock last week was Chemical Banking Corp. The shares rose 9.3%, to $44. Money managers said the shares are still cheap, and they, expect the stock to continue to ga n 15% by yearend.

Citicorp Streak Continues

First Union Corp.'s stock soared last week, too. The shares rose 8.1%, to $47.75, but they are still far below their 52-Week high of $53.125. Even with that gain, First Union is considered to be very cheap, trading at about 10 times training earnings, under its historical range. In addition, the dividend yield is 3.3%. Citicorp shares continue to be hot, rising 8% to $35.625, another record. First Chicago Corp.'s shares jumped 7.6%, to $48. Even BankAmerica Corp.'s shares, which have been flat for a year, showed signs of life, gaining 5.7% to $48.875.

Moreover, those price increases came on heavy volume. Citicorp, for example, traded 2.7 million shares Friday.

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