Bank stocks are expected to rise this week, breaking the boom-and-bust pattern that has surrounded their earnings announcements in recent quarters.

For the past three quarters, banks stocks have run up before earnings announcements and crashed soon after - even as the industry continued to set quarterly earnings records.

This pattern was repeated for much of last week, with bank stocks falling for three straight days despite strong earnings reports from the likes of First Chicago Corp., Bank of New York Co., and J.P. Morgan & Co.

The American Banker index lost 2.2% in the five trading days ended Thursday, versus a 1% gain in the Dow Jones industrial average.

Results Due for Big N.Y. Banks

But the shares showed some signs of life late in the week, giving hope that this week's scheduled earnings releases from big New York banks and some of the top superregionals will spark further recovery in the shares.

"I think the sell off has subsided and share prices are stabilizing." said Sam A. Marchese, director of Sife Trust Fund, Walnut Creek, Calif. "I believe they can start to move higher this week."

Money managers and analysts breathed a sigh of relief as what started out as another rout of bank stocks was quickly reversed.

"Our sense is that the market has firmed, both for money-center and superregional banks," said Thomas H. Hanley, an analyst with First Boston Corp.

Gains for Industry Leaders

Six of the 10 biggest banks were up slightly on Friday, a sign of returning strength for the sector. BankAmerica Corp. gained 37.5 cents to $44.875, and Citicorp's shares rose 37.5 cents to $31.75.

Among the biggest losers on the week were First Union Corp., which dropped 4.8% from $49.25 to $45.625, and Mellon Bank Corp., which fell 3.9% from $57.875 to $55.625.

Analysts said last week's sell-off stemmed mostly from profit taking. Bank shares had risen about 10% in the previous month, giving investors the chance to sell holdings. Trading volume was light early in the week, indicating that there was not a wholesale rush to sell.

But stocks of some banks sold off sharply when their earnings reports fueled investor concerns about whether they could sustain earnings growth.

Shares of Signet Plunge

Signet Banking Corp., for example, reported last Wednesday that net interest margin narrowed by 32 basis points, to 5.03%. The stock lost $4, to $50.75 on the day. The stock dropped even though Signet reported that net income rose 41% to $40.4 million in the period.

Two factors cut short last week's bank stock downturn, analysts said. Inflation worries, which crushed bank shares last quarter, dissipated with last week's announcements that wholesale prices fell 0.3% in June and consumer prices were unchanged that month.

The Good News

In addition, there have been some pleasant surprises among the earnings announcements. They provide evidence of a modest revival in loan demand, excellent trading revenues, sharp declines in nonperforming assets, and expense control.

Good reports from some banks have pushed Wall Street to raise earnings estimates. For example, PaineWebber analyst Lawrence Cohn said Friday that he raised his 1993 earnings estimate for J.P. Morgan to $7.45 a share from $6.15.

Last week's positive surprises have set the stage for share prices to rise this week. Following in the footsteps of J.P. Morgan and First Chicago, the New York banks reporting earnings this week are expected to show substantial gains in trading income. The group includes Chase Manhattan, Chemical, Citicorp, and Bankers Trust.

"The strong trading revenue reported by other banks holds out the prospect for material earnings surprises that haven't been anticipated," said Judah Kraushaar, an analyst with Merrill Lynch & Co.

Mr. Kraushaar said Bankers Trust's second-quarter trading revenues may yield the biggest surprise.

For the superregionals that will announce earnings this week - including Nationsbank, Welis Fargo, and First Interstate - Mr. Kraushaar is not concerned about a shrinkage in net interest margins.

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.