NEW YORK -- The likelihood of a widespread cut in the prime rate appears to be fading fast, to the relief of investors in bank stocks.
After plunging 2.66% on Monday and another 0.97% Tuesday, the American Banker index of 225 bank stocks edged up 0.36% on Wednesday and was up 0.35% at 2 p.m. on Thursday.
Major bank stocks were generally mixed, either up or down fractionally. Analysts interpreted that uneven performance as a positive sign, given the recent selloff.
Morgan Triggered Slide
Bank stocks got hammered Monday after Morgan Guaranty Trust Co. cut its prime lending rate by half a point to 5.5%.
But as of Thursday, no other major bank had followed in Morgan's footsteps, leading economists and analysts to conclude that the prevailing rate will remain at 6%, barring a change in monetary policy by the Federal Reserve Board.
"If it hasn't happened by now, then I don't think it will," said Jeff Thredgold, chief economist at Albany-based Keycorp, of a widespread cut in the prime.
Morgan's prime-rate cut prolonged a selloff in bank stocks that began last week, with the release of third-quarter results.
After running up in anticipation of strong results, bank shares fell back on profit taking and renewed concerns about shrinking profit margins.
While analysts were expecting a modest correction, Morgan's unexpected rate cut further roiled the market for bank stocks.
Move Was a Surprise
"Things had king of settled out, up until the point when Morgan cut, then there was a new cascading" of stock prices, said Diane Glossman at Salomon Brothers.
The Morgan-induced selloff was exacerbated by the fact that some analysts apparently overestimated the hit to earnings that banks would suffer from a half-point drop in the prime.
Chemical Banking Corp., for example, had to talk down inflated estimates of the potential damage Monday. The bank said its earnings would fall by no more than about 8 cents a share from a half-point reduction in its prime lending rate.
Unusual Step by Chemical
The bank earned $1.84 a share in the third quarter.
Chemical officials also took the unusual step of telling reporters at a press conference Tuesday that it had no immediate plans to cut its prime.
The main purpose of the press conference was to announce earnings and high-level management changes.
But in tipping its hand about its prime rate, Chemical departed from the usual practice among banks of keeping mum until a change in the prime actually occurs.
A Chemical spokesman Thursday said there was still no change in the bank's posture concerning its prime rate.
Spokesmen at several other major banks continued to decline comment Thursday on their banks' intentions concerning the prime.
Morgan's Motives
In the face of widespread skepticism concerning its motives, a Morgan spokesman Thursday stuck to the bank's official explanation that its primerate cut was based soley on economic fundamentals.
Morgan won't feel much impact from the reduction, because it has few prime-based loans.
Analysts and economists have speculated that Morgan cut its prime either to tweak its competitors, or in response to political persuasion from Washington.
Banks typically cut their prime lending rates in response to a change in Fed policy, but that didn't happen this time.
"This cut appeared out of the blue, without any particular clue from the Fed, or market rates," said Gary Ciminero, chief economist at Fleet Financial Group in Providence, R.I.
Indeed, short-term rates were actually up on Monday, when Morgan announced the cut in its prime, he said, adding: "The market zigged, when Morgan zagged."
Even if there was a wide-spread drop in the prime, many economists doubt in would spur borrowing and economic activity. The main problem, they agreed, is a lack of confidence on the part of consumers and businesses.
