Banks Outperform Market In Strong December Rally

Accompanying the broad stock-market rally last week was an even more explosive recovery in bank share prices that some analysts saw as a launching pad for further gains in the new year.

On average, bank stocks cooled off Friday, but not before they had run up gains for the week that well exceeded those of the Standard & Poor's 500 and the Dow Jones industrials.

Analysts remained decidedly bullish on the banks, which got a big boost on Dec. 20 when the Federal Reserve slashed the discount rate by a percentage point to 3.5%, the lowest level in 27 years.

Indexes Are Up

The American Banker index of 225 stocks rose 9.84% last week. By comparison, the S&P 500 gained 7.6% and the Dow was up 5.7%.

In Friday's breather, the American Banker index picked up only 0.2%, while the Dow gained 0.6%.

"The gains are not as robust as they were on Thursday, but on balance they are positive," James J. McDermott Jr., president of Keefe, Bruyette & Woods, said Friday. While some banks had picked up more than $2 a share Thursday, gains Friday were mostly 25 or 50 cents.

The rally may have brought the stocks to a new plateau. Mr. McDermott said he expects banks can hold onto the gains in 1992 and outperform the S&P 500, since the lower discount rate should swell interest spreads.

Indeed, the bank rally started before the Fed's Dec. 20 rate move. Over the past four weeks, the top 25 banking companies outran the S&P 500 with a gain of 10.8% against 7.1%, according to Montgomery Securities.

Analysts said the slower gains by bank stocks Friday reflected profit taking as well as buying and selling within the group. Barnett Banks Inc., for example, was off 87.5 cents to $33.375, after rising 22% during the first four days of last week.

The biggest gainers in the week were Bank of New York Co., Security Pacific Corp., BankAmerica Corp., and MNC Financial Inc., which all picked up more than 20%.

By late Friday, Bank of New York fell 75 cents, to $32.125; Security Pacific gained 12.5 cents, reaching $32; and Bank-America gained 12.5 cents, to close at $38.50.

Institutional investors specializing in bank stocks said they had money to invest from clients seeking to ride the big gains of recent days. Their targets were mostly big, well capitalized regionals.

In Search of Momentum

"Investors are using the strength of the rally to change their portfolios around to focus on the names that have momentum for 1992," said J. Richard Fredericks, an analyst with Montgomery Securities in San Francisco.

Bankers Trust New York Corp., which had not risen as much as some of the other big banks in the preceding several days, was up 87.5 cents to $64.75. The stock had dipped below $60 after the bank announced that fourth-quarter earnings would be flat.

KeyCorp, Albany, N.Y., was another big gainer, rising $1.125 to $43.25. Republic New York Corp., the conservative money-center bank, gained $1, reaching $44.25.

But some of the stocks that were hot early in the week cooled off. J.P. Morgan & Co., which gained $2.75 on Thursday to $69.50, a new yearly high, was unchanged Friday. The shares had jumped more than 13% since Dec. 19, when they closed at $61.25.

Citicorp's rally slowed as well. The banking company hit a low of $8.625 on Dec. 20 but rebounded by Thursday's close to $10.75. On Thursday alone, Citicorp's shares gained 10%. The stock was still at $10.75 late Friday.

Citicorp's hold on its gains may be more tenuous than other banks'. One institutional investor said he would not buy Citicorp stock until the banking company releases its fourth-quarter earnings.

One aspect of the rally was that the stronger banks got rewarded. Shares in Banc One Corp., which has the second-highest market capitalization behind J.P. Morgan, had already gained 70% over the year - before the Fed's latest rate cut. After last week's rally, the value is up 84%.

"What was beginning to be established through 1991 will continue - investors will move toward those banks with a strong balance sheet and the differentiation in the group will continue apace," said Mr. Fredericks.

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