Reacting to a major rally in the bond market, investors Thursday bid up bank stocks across the board.
As Treasury prices rose sharply after the government reported June retail sales were lower and state unemployment claims higher than expected, investors quickly turned to bank stocks, long tagged as "interest-rate sensitive."
Wells Fargo shot up $3.875 to close at $157.75, while NationsBank jumped $1.50 to close at $54.50. Only four of the top 50 banks lost ground.
But analysts questioned the interest-sensitive label. While institutions with large derivatives portfolios obviously would be aided by the rally, banks as a group have changed in recent years.
More to Life than Rates
"Investors tend to read more into it then they should," said Carole S. Berger of Salomon Brothers. "When they fear that rates are rising they will leave the group like crazy. And when the bond market rallies they jump into bank stocks with both feet."
Banks do not live and die with interest rates, she said. Economic factors are a more important determinant of margins, Ms. Berger said.
Similarly, Joseph C. Duwan of Keefe, Bruyette & Woods Inc.. called the link between interest rates and bank stock performance a fallacy. Particularly regional banks with high core deposits can earn more from slowly rising rates than declining rates, he said.
"All other things being equal," he said, "banks tend to price loans more quickly than core deposits." As a result, slowly rising rates are in the banks' best interest, he said, because they lead to large, if temporary spreads between deposit and loan rates.
J. Richard Fredericks of Montgomery Securities called the interest-sensitivity tag a "historic misnomer." Bank stocks have outperformed the market this year despite rising rates, he said.
This is a result of better management of interest-rate exposure and far more liquidity, he said. Capital is more valuable with higher rates, he added.
Not all were in agreement, however, that investors were mislabeling bank stocks as interest-rate sensitive.
Ron Mandle of Sanford C. Bernstein & Co. argued rising bond prices was good news for banks. Higher prices improve banks' bond portfolios, which means higher price-to-earnings ratios, he said.
Banks stocks are interest-rate sensitive, said Frank R. DeSantis of Donaldson, Lufkin & Jenrette. Banks borrow short and lend long, so stability of short-term rates - ensured by falling long-term rates - solidify banks margins, he said.
But Mr. DeSantis warned the yield curve, which has been steep the last two years, is more important than the rate.
That curve will flatten in the future, he predicted, and bank profitability will get crunched. Competition for loans is going to keep loan rates from rising faster than deposit rates, he said. And he pointed out that while bank stocks were up yesterday, they underperformed the market. The S&P 500 was up 1% by midday, while banks as a group were only up .7%, he said.
Mixed earnings reports capped rising stocks, analysts agreed. J.P. Morgan & Co. reported second quarter trading revenue was down 36% from the first quarter to $228 million.
As a result, Morgan, which normally would be helped by falling rates because of its large bond portfolio, ended the day down 25 cents to close at $61.
Boatmen's Bancshares, buoyed by positive earnings, rose 75 cents to close at $33.25. Banc One, which has a large derivatives portfolio, ended up 50 cents to close at $34.375.
Mellon Bank Corp. ended up $1 to close at $57.125 and Barnett Banks ended the day up $1.125 to close at $44.875.
Huntington Bancshares reported earnings below expectations, and closed down 62.5 cents for the day at $24.625.
Other strong gainers included Citicorp, which closed up 62.5 cents to end at $41; and Northern Trust Co., which closed the day up $1 to end at $41.5.
The Dow Jones industrial average gained 34.97 points to close at 3739.25. Half an hour before closing, the 30-year Treasury had gained 44 basis points, with its yield falling to 7.54%.