Investors dumped bank stocks Monday on fears about the plummeting dollar and Hurricane Andrew.
The American Banker index of bank stocks was down 2.21% on the day, versus a 0.8% drop for the Dow Jones industrial average. The Dow closed at 3,228.17, down 25.93 points.
It was the second time in five days that bank stocks had been hit much harder than the overall stock market. Last Wednesday, bank stocks retreated 1.9% on rumors that large investors were dumping bank stocks.
Money-center banks with big international trading operations were slammed Monday. But regional banks were rocked as well. Analysts said investors increasingly believe that the weak dollar will mean the end of the long slide in interest rates.
Winds of Change
"The buyers who moved into bank stocks to benefit from declining rates and who were hanging on for one more rate cut are getting out now," said Felice M. Gelman, banking analyst at Dillon, Read & Co.
Concern about Hurricane Andrew, which swept through Miami Monday, also hurt some large southern bank stocks. First Union Corp. fell $1.50 to close at $36.625.
First Union, based in Charlotte, N.C., last year acquired Southeast Banking Corp., Miami's largest bank, in a government-assisted transaction.
Other North Carolina banks fell along with First Union. Wachovia Corp., Winston-Salem, fell $2.875 to $59, and Nations-Bank Corp., Charlotte, dropped $1.875 to $43. Among Florida-based banks, Barnett Banks Inc., Jacksonville, Fla., slid $1.50 to $35.75.
As for money-centers, Bankers Trust New York Corp., whose foreign exchange trading revenues are monitored carefully by analysts, slipped $1.50 to $60, while Chemical Banking Corp. surrendered $1.125 to $32.125 and J.P. Morgan & Co. eased $1.125 to $58.625.
Among big regionals, Banc One Corp., Columbus, Ohio, fell $1.125 to $42.50; Comerica Inc., Detroit, dropped $1 to $58; and State Street Boston Corp. lost $1.375 to $35.125.
"It's the washout," said Nancy A. Bush, regional bank analyst for Brown Brothers Harriman & Co. "Those who were never in for the long haul are folding."
The weakness of the greenback discourages foreign investors from buying dollar-denominated securities. The foreign appetite for U.S. securities had already been dulled by the Fed's previous rate cuts.
Postwar Low for Dollar
The dollar on Monday slumped to another new postwar low of 1.4195 German marks in intraday trading, despite intervention by central banks. An emergency meeting of the Group of Seven industrial nations has been called this week to discuss the situation.
The dollar's drop is due to the large differential between U.S. and German interest rates and the weak U.S. economy. Support from the central banks last Friday failed to stop the dollar slide and caused the stock market to drop 50 points.
"The dollar news has spooked everybody, and whenever there is a signal of economic weakness, it quickly gets translated to the bank stocks," said Ms. Bush. "They're vulnerable since there are plenty of profits remaining to be taken, even at these price levels, because of the long run these stocks have had."
Banks have been primary beneficiaries of lower rates. The cost of funds for banks has fallen faster than their interest income, but rates have fallen so far that banks' credit quality problems have been eased by the lower burden for borrowers.
Another Fed Cut Unlikely
With business conditions at low ebb, many on Wall Street had anticipated one more rate cut from the Fed before the presidential election on Nov. 3. However, "the dollar situation implies the Fed won't be able to do that," said Mark Alpert of Bear, Stearns & Co.
As a result, bank stocks have come under pressure. Ms. Gelman said they are likely to remain so in the near future "despite the good fundamentals we are seeing and will continue to see."
Good News in Short Supply
Other analysts noted further causes for Monday's decline. "It's been a lousy market anyway, and this is one more reason to get out," said Anthony J. Polini of A.G. Edwards & Co., St. Louis. "We are between [earnings] reports, and there is an absence of good news."
Mr. Polini and Ms. Bush both noted the declines on low volume in many bank issues.
"It's summer, and there are no buyers around, and the specialists are only going to hold their positions for a certain length of time," said Ms. Bush. "That has only exaggerated matters."
A few bank stocks managed to rise. Northeast Bancorp., Stamford, Conn., which plunged last week after announcing an adverse restatement of its second-quarter financial results, was up 62.5 cents to $8.375. The company, hurt by the recession, has put itself up for sale.