After outperforming the overall stock market for the last month, bank shares fell back to earth last week amid heavy profit taking.

In the five trading days ended Thursday, the American Banker index of bank stocks, a weighted index of 225 bank stocks, lost 1.25%, according to SNL Securities.

In contrast, the blue-chip Dow Jones industrial average gained 1.15%, and the Standard & Poor's 500 stock index gained 0.4%.

"Triple Witching Hour'

The selloff in banking stocks continued Friday. The losses were small, however, despite heavy trading related to the "triple witching hour," when quarterly stock index futures and other investment contracts expire.

The Dow Jones industrial average lost 17.60 points Friday, to 3,613.25.

Many of the large-capitalization bank stocks saw big drops last week, an indication that institutional investors were selling. BankAmerica Corp. ended Friday at $47.25 a share, down $1.625, or 3.3%, for the week. Banc One Corp. finished at $40.375, off $2, or 4.7%. NationsBank Corp. finished at $50.125, down $2.875, or 5.4%.

Morgan and BT Hit

The two premier trading banks, J.P. Morgan & Co. and Bankers Trust New York Corp., were hit hard early in the week when PaineWebber Inc.'s Lawrence Cohn downgraded their shares to "unattractive," from "neutral."

Morgan finished the week at $79.25, down $4, or 5.1%. And Bankers Trust fell $4, or 4.8%, to $79.25.

Robert Bonelli, executive director of Ernst Financial Group, a New York money manager, said last week's selloff amounted to profit-taking and did not reflect a shift in sentiment against bank stocks.

"Bank stocks ran up sharply in heavy trading at the end of the previous week," he said. "When bonds turned down, there was normal profit-taking."

Prices of long-term government bonds took a nosedive last week after rallying for most of the summer. The decline sent the yield on the 30-year bond to 6.03% Friday, from 5.87% the previous Friday.

A government report showing a surprising 0.3% jump in consumer prices sparked the bond market decline. The report dashed hopes for a Federal Reserve easing and made a tightening more likely. A tightening would presumably pinch bank net interest margins.

Thomas Brown, bank stock analyst at Donaldson, Lufkin & Jenrette Securities Corp., said investors continue to engage in a "tug-of-war" between those who think rising short-term interest rates will pressure bank earnings and those who think the group offers good earnings relative to other industries.

"Last week, the negative side gained," he said.

20% Rise Forecast

Mr. Bonelli of Ernst Financial said he thinks bank stocks as a group will rise 20% by yearend. As of last Thursday, the American Banker index was up 10.32% on the year. Mr. Bonelli said that, even if spreads narrow, increased loan demand could allow margins to increase.

One stock that might get a boost this week is Signet Banking Corp. Company officials are making a presentation to analysts Thursday, and shares of the Richmond, Va., bank may get a lift' said Mr. Brown of Donaldson Lufkin.

Hugh Johnson, market analyst at First Albany Corp., is less optimistic about the industry. "Bank stocks have performed better in this bull market than in any other time in history," he said. "That makes you intuitively scared."

He added that most of the good news, including reduced loan-loss provisions, has already been factored into prices. Finding potential acquisition targets remains one of the few ways to make money in bank stocks, he said.

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