Banks stocks struggled again on Monday to shake off investor fears about the impact of higher interest rates.
Most banks were lower, but they fared reasonably well in the face of a selloff that swept both the stock and bond markets and investors prepared for further credit tightening by the Federal Reserve Board.
"We are at the point of maximum confusion in the business and interest rate cycle," said Nancy A. Bush, regional bank analyst at Brown Brothers Harriman & Co., New York.
There appears to be "recognition that the banks are better preperate for rising rates than in past cycles, with more variable-rate assets and and more sophisticated ways of hedging," she said. "But fear and trepdidation are still going to be three too."
Money-Centers All Down
In Monday's market, the money-center bank shares were all lower in prices, reflecting investors' worries about their sensitivity to market interest rates.
Bankers Trust New York Corp. shares fell $1.625 to $66, Citicorp was off 50 centes to $37.125, and Republic New York Corp. fell $1.25 to $46.
The superregional and smaller regional banks were mixed, with some managing reasonable gains despite the general market downdraft.
Consolidation a Factor
Boatmen's Banchshares shares rose 50 cents to 31.375, while Norwest Corp. shares were up 37.5 cents to $25.25 on a day the Dow Jones industrial average was off 40.46 points to 3,629.04.
"The banks, especially the regionals, have clearly weathered the storm better than a lot of people thought they would in a rising-rate environment," said Frank W. Anderson, banking analyst at Stephens Inc., Little Rock.
Mr. Anderson thinks the potential for managers is the big difference from past rising-rate periods. "Consolidation is the theme of the '90s. There are a lot of people who wouldn't be buying these stocks now if not for this," he said.
As for rates, the Stephens ananlyst thinks the central bank is going to have to push them considerably higher. "I think it is going to require at least a 4.5% to 5% [federal] funds rate to stabilize the bond market," he said.
The Fed has raised the federal funds rate, the rate of overnight loans among banks, three times since early February. The central bank's target for the funds rate currently is 3.75%.
Another rate increase is seen as likely by noi later than a week from today, when the Fed's policymaking Federal Open Market Committee is scheduled to meet to discuss the nation's business conditions.
Wall Street is currently speculating about whether the next tightening action will be another 25-basis-point funds rate increases, as before, or a 50-basis-point incrrease plys a hike in the discount rae.
"A modest increase is already well discounted," said Frank J. Barkocy, banking analyst at Advest Inc. "A 25-basis-point move is already reflected in the bank stocks," he said. "If they go up 50, we will see some rolling in the group."
Mr. Barkocy said he hopes the Fed will opt for a smaller 25-basis-point move.
"I'm still having trouble justifying the tightening to the degree we've already seen," he said. Given the advance discounting, he thinks a smaller move would also mean a chance of "some good bounce-back in the bank group."
Stephen Berman of Natwest Securities Inc. thinks that "after one more big move by the Fed, the bond market will probably rally and we will have a period of stability for rates for a while."
That should benefit banks, which he believes will attempt to match any Fed moves by raising their prime rate to maintain their net interest margin.
Mr. Berman thinks margins, a key factor in bank revenues, will be under pressure in this quarter, as they were in the previous quarter. But increasing loan demand as the economy expands should stabilize margins by later this year.