Short-sellers reduced their bets against big banking companies after fourth-quarter earnings reports failed to reveal the bad news the cynical investors had expected.
Short interest in bank-related stocks slipped 6.2% in the month ending Feb. 15, and dropped significantly in BankBoston, Sovereign Bancorp, and Wells Fargo shares, according to the New York and American stock exchanges.
Short-sellers borrow stock, hoping its price will decline, enabling them to profit when they replace the shares.
Investors had taken short positions in BankBoston, in anticipation that troubles in Latin American operations would show up in fourth-quarter results.
During that monthlong period there was a 40.1% decline in BankBoston shares that were borrowed in anticipation that they were going to fall, to 1.5 million. This "probably had a lot to do with when earnings came out," said Stephen Biggar, a banking analyst with S&P Equity Group. "There was some relief that they handled the Latin American earnings so well."
BankBoston "did a great job" insulating itself from volatility in the region, Mr. Biggar said.
Nonetheless, Mr. Biggar rates BankBoston's shares a "hold," saying its earnings are only average for the banking sector.
Short interest in Wells Fargo & Co. declined by 33%, to just under 14 million shares.
Short-sellers had thought the bank, which resulted from the merger in the fall between Norwest Corp. and Wells, would have trouble wringing the expected cost savings from the deal, said Sharada Krishnappa, a banking analyst at Parker/Hunter Inc.
Wells Fargo & Co. is "a long-term buy story for us," Ms. Krishnappa said. "The merger seems to be coming together rather well. The old Norwest had a very good marketing strategy of having 3.8 relationships with each customer."
The new company is trying to increase that ratio and at the same time tap into Wells Fargo customers, analysts say. This year "should be kind of a transition year for Wells Fargo," Ms. Krishnappa said. "They will be employing cost savings and getting rid of some branches. We expect the synergies to kick in which could drive (up) the stock price," Ms. Krishnappa said.
Parker/Hunter believes Wells can double revenue from its fee-based services this year. These business lines include trust and investment management, mortgage banking, and credit cards.
Still, "there are some problems," Ms. Krishnappa said. In the fourth quarter, "return on equity decreased to 14.5%, which was the figure Wells Fargo had before the merger."
Ms. Krishnappa noted that the initial projection of cost savings was 50% in 1998, but the company achieved only 25%. "Management still expects cost savings of $650 million over the next three years."
Sovereign's short interest declined by 23%, to 4.2 million shares, Nasdaq reported. "People are more bullish on the stock," said John Rezai, banking analyst with Blaylock & Partners. The decline in short interest reflects evidence "that over the next few years management will make significant progress in reaching its goals," Mr. Rezai said.
Sovereign "is a super story," Mr. Rezai said. "You have this little company that five years ago really became active. They made a community bank into a well capitalized regional bank."
The banking company "is much more automated and has made attractive acquisitions," Mr. Rezai said. At the same time, it could become an attractive takeover target, Mr. Rezai said.
The biggest decline in short interest came for subprime lender Americredit. Short interest in its stock declined 42%, as it found a market for securitization of its loans.