It was a banner year for bank stocks in 1996, with shares at large and small ones outperforming a strong bull market.

The American Banker bank index, which covers shares at 225 banks, rose 36% in 1996, compared to 21% for the S&P 500. Large banks and credit card specialty companies led the way, rising 36% and 55%Natwest Securities, respectively.

Although this was a strong year for most banks, it was not a record jump for the sector. The American Banker bank index grew 48.8% in 1995, the largest one-year jump during the 1990s.

Among the five largest banking companies, Chase Manhattan Corp. turned in the most impressive stock price jump. Shares of the New York-based banking company jumped 53.1% during the year to close at $89.375. But Citicorp was not far behind, rising 52.9% to $103 a share.

The 10 banks with the steepest stock appreciation during the year were all community-sized institutions.

"Small banks are doing well because they continue to benefit from customer dislocation from larger banks," said Joseph Stieven, an analyst with Stifel, Nicolaus & Co., a St. Louis-based brokerage.

First Coastal Corp., a $136 million holding company for Coastal Savings Bank in Westbrook, Maine, registered the largest one-year stock price jump, rising 417% to close at $7.75.

According to the bank's chief executive, the bank's remarkable ascent was related to an unusual circumstance: Last summer, First Coastal paid regulators money owed for the failure of another bank within the holding company.

"After we paid our obligation, suddenly our stock had real tangible value," said Gregory T. Caswell, president and chief executive officer.

Wall Street analysts say they expect that banks stocks will come down to earth in 1997, though they still expect to see performances that exceed the market average.

Harold Schroeder, bank analyst at Keefe, Bruyette & Woods Inc. argued that an anticipated market slowdown should benefit banks. Price-to-earnings ratios are still low at most banks compared to other sectors, he observed, so there may be more room for growth despite already strong gains.

"We're looking for low double-digit growth in banks, which should hold them in good stead compared to other sectors," said Mr. Schroeder. "Selectivity will be an issue - it's always an issue - but this year investors are going to start picking the haves and have-nots."

The "haves" will distinguish themselves from the "have nots," he said, by increasing revenues at a time when a favored way of doing that - cutting expenses and offering new services - has been just about exhausted.

"For the last few years banks have added ATMs, new mortgage products, credit cards, and so on. At some point products like these peak in what they bring to the bank," Mr. Schroeder said.

He said he thought securitization would become an increasingly important mechanism for banks to raise funds while shedding assets from their books.

The difficulties banks may experience generating earnings is one reason Thomas McCandless, bank analyst at Natwest Securities, writes that "bank stocks may have more downside potential than upside opportunity in the short term."

The lingering problem of consumer credit threatens to hurt bank earnings once again in 1997, he said. A record number of consumers filed for bankruptcy in 1996, and Mr. McCandless says an additional 35% jump can be expected in 1997.

And though some critics have dismissed the ongoing consumer credit issue as overblown, citing continued strong demand for commercial loans, Mr. McCandless says there is evidence to suggest banks have loosened their lending standards of late.

This past year it didn't seem to matter much in which financial sector investors put their money; they all did well. Government-sponsored enterprises rose 20%, mortgage companies were up 25%, and specialty finance companies rose 36%.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.