After taking a pounding for much of the last quarter, bank stocks came back last week and outperformed the rest of the market.
For the week ending Thursday, the American Banker index of 225 stocks rose 3.03%, while the Dow Jones industrial average rose only 0.52%. Analysts attributed the rally in banks to bargain hunting by investors.
During a month in which it seemed that nearly every day brought news of a restructuring charge as a major bank reacted to rising rates, bank shares continued to drop in value, and investors kept their distance, analysts said.
But as it began to appear that the Federal Reserve would hold steady on short term rates at least for now, the investors began to reemerge.
"A lot of people who wanted to get into the market were sitting on the sidelines. A lot of people were looking to buy and just waiting for an opportunity," said Moshe Orenbuch of Sanford C. Bernstein & Co.
Bank stocks "got down really low," said Dennis Shea of Morgan Stanley. "They fell hard and fast. The selling was overdone."
Mr. Orenbuch said a "smattering of positive news" bolstered investors' confidence in the group.
Stable rates and good value helped spur the buying, he said. And Purchases of shares by short sellers covering their positions also may have been a factor. Short sellers try to profit from declining prices by borrowing shares at one price and replacing them with shares purchased at a lower price.
Some of the biggest gainers during the week were Citicorp and NationsBank, Charlotte, N.C.
By Friday's close, Citicorp had rebounded to $42.625 from $40 on Dec. 8.
NationsBank rebounded to $46.125 Friday from $43.75 on Dec. 8.
Bankers Trust New York Corp. shares fell as low as $57 two weeks ago as investors reacted to bad news about the company's trading business. But the price rebounded to $57.875 last week. The stock fell back sharply after a Washington Post artilce Thursday that said the bank would be forced to sign a consent decree with regulators, and closed the week at $56.625.
Lehman Brothers Inc.'s Michael L. Mayo attributed the comeback in regional bank stocks to improving margins at banks, better efficiency, prospective lower federal deposit insurance costs, and crisis-level prices at a time when there was no crisis.
"The prices got so incredibly cheap," Mr. Mayo said.
Mr. Mayo recommended CoreStates Financial Corp., Philadelphia, as a top regional selection because its franchise value is nearly 40% more than its current stock price.
He also recommended Keycorp, Cleveland, whose stock he said is "too cheap to ignore" at his 12-month price target of $27.