Bank stocks fell Monday as investors took profits, and the specter of higher interest rates crept back into market.
Banks that suffered the biggest declines were those that had the biggest gains in last week's rallies. Northern Trust Corp. fell $4.4375, or 6.61%, to $62.6875; First Tennessee National Corp. $1, or 5.26%, to $18; and J.P. Morgan & Co. $5.6875, or 4.16%, to $131.125. The American Banker index of the 50 largest banks fell 1.08%, and its index of 225 banks fell 1.55%.
A broad bank stock rally last week began to lose steam Friday. "Given that there was a rally in the group last week, it is normal to expect profit taking," said Michael Plodwick, an analyst at Lehman Brothers Inc. "Before investors take bank stocks higher, they will have to take some comfort in the first-quarter earnings."
First-quarter earnings for many of the money-centers should be strong because of their capital markets businesses, said Mr. Plodwick. "But plain-vanilla banks are likely to experience margin compression."
Bank stocks gained after the Federal Open Market Committee raised two key interest rates by 25 basis points last Tuesday. Initially, the market saw the action as confirmation that the Fed was steering the fast-growing economy toward a soft landing.
Interest rate concerns were re-ignited after the release of the Federal Open Market Committee's February minutes last week.
The minutes showed that a some of the voting members favored raising interest rates 50 basis points, said Thomas Carpenter, chief economist at ASB Capital Management in Washington.
The market was also spooked by the Fed's statement last week that it remains concerned about inflation.
"If FOMC members wanted to raise interest rates by 50 basis points at the February meeting, and the Fed is still concerned about the economy despite its last interest rate hike, market participants are going to follow the logic, which is that the Fed will likely raise interest rates by 50 basis points at its next meeting," Mr. Carpenter said.
Higher short-term interest rates can compress bank margins and slow the economy down to point where loan growth slows and good loans turn bad.
Mr. Carpenter said he expects more interest rates hikes, but is not too concerned about banks stocks.
"If the Fed is behind the curve as far as slowing down the economy at this point, it is not measurably behind the curve," he said. "If there are price pressures, they are not significant."
Eventually short-term interest rates will peak this year, said Mr. Carpenter. "And when they do the group will rally substantially."
