After years of work building fee-based income, reducing sensitivity to the interest rate cycle, and positioning themselves to reap the riches of history's longest boom via investment banking and venture capital businesses, the banks have finally gotten their stocks to behave like tech stocks.

As a result, they are watching their share prices get punished twice this cycle around. Despite unquestioned achievements in balancing their businesses away from interest rate fluctuations, bank stocks have spent the past year in a broad decline, hounded by the threat of rising interest rates. And the effect may only worsen, given Wall Street's expectation that the Federal Reserve's tightening cycle is about to intensify.

For all this interest rate concern, almost no one on Wall Street seems to think bank profit growth is actually at risk. According to data provided by First Call, analysts expect their profits to rise by 7% in 2000 and another 11% in 2001. For thrifts, the outlook is equally positive, with forecasts of 9% profit growth this year and 15% next year.

"The banks are clearly more astute at handling interest rate cycles," said Ned Riley, chief investment strategist at State Street Global Advisors.

"The ironic part of this is that the marketplace seems to be operating under the old notions, despite consistently growing profits."

Indeed, while other industries have strained to cope with their inability to pass rising costs on to customers, banks have seen demand remain strong for all kinds of loans, regardless of rate spikes. Home sales have stayed robust despite mortgage rates hovering near five-year highs. Corporate borrowing levels climbed in the first quarter, when tumultuous equity markets made share offerings less favorable.

The big payoff never came. Everyone expected investors to rush to old-line financials once the new-economy stock market bubble deflated, but it just didn't work out that way. Instead, banks are paying the price for giving Wall Street exactly what it wanted, an opportunity to participate in the booming business of developing and then bringing to market the next generation of technology companies.

Take what has happened to Chase Manhattan Corp. Perhaps better than any other major bank, Chase built itself a powerful venture capital business and then showcased that operation in presentations to Wall Street analysts. In return, Wall Street gave Chase a big hug.

Alas, it turned out to be a bear hug. One by one, analysts have cut their profit estimates on Chase, citing the volatile nature of venture capital gains in an unstable market for technology stocks. J.P. Morgan analyst Catherine Murray on Friday became the latest to lower her investment rating and slash her outlook for the bank. (See article, page 32.)

"We expect lingering uncertainty regarding the outlook for the Nasdaq, and more Fed tightening, to limit stock outperformance for at least two to four months," she wrote in a note to clients.

Indeed, Chase's stock price performance over recent months looks a lot like the Nasdaq Composite, a phenomenon noted last week by A.G. Edwards analyst Diana Yates. Her view: Chase would eventually rally on the strength of its nontechnology (read banking) earnings.

Of course, banks - though not always thrifts-have survived and even succeeded in past tightening cycles, despite their sensitivity to rates. The FDIC's own data on commercial banks shows only one year since the 1930s in which net interest income declined.

There is plenty of reason to believe that this time the group will fare better. Noninterest income has surged and in 1999 accounted for 44% of commercial bank operating revenues.

Will there be casualties of the tightening cycle? Absolutely. Some financial companies, Finova Corp. most recently, pointed to rising borrowing costs as a potential drain on profitability.

Consumer finance companies watched their share prices tumble in sympathy.

But apart from whatever pockets of weakness may develop, if history is a guide most banks should assemble strong profits this year and carry that momentum over into 2001.

At the same time, if history is a guide, Wall Street will opt not to reward them for their successes. Not this year, anyway.

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