Banks have proved more seaworthy than other stocks in the recent storm that has battered financial markets.
With the plunging dollar and bond prices unnerving investors, the American Banker index of 225 bank stocks managed a 0.4% gain in the five trading days through last Thursday, versus a 2% loss for the Dow Jones industrial average.
Over the past month, the bank index fell 2.4% in value, but the blue chip index was off a significantly larger 3.6%.
"The banks have held up relatively well under the circumstances," said James J. McDermott Jr., president of Keefe, Bruyette & Woods Inc., New York.
"That bodes well for the rest of the year," he said. "Particularly with the support of dividend increases and stock buyback programs, they ought to do just fine."
Friday, the markets generally marked time in advance of the Independence Day holiday, as well as today's session of the Federal Reserve's open market committee.
That monetary policymaking group could raise interest rates again, this time to defend the greenback in international currency markets. The dollar last week fell to another new postwar low against the Japanese yen.
"An interest rate hike from the Fed is now a 50% possibility," according to James P. Benson, research director at Ryan, Beck & Co., West Orange, N.J.
Harm from Rate Increase
Another rate increase would hurt financial stocks by reducing the value of financial assets, analysts noted, but it would likely hurt industrial stocks more by further slowing the economy.
Meanwhile, Mr. McDermott said he thinks that divisions in the market among bank stocks could be worsened by nagging questions about revenue growth in the industry.
"The market is going to be distinguishing more and more between those who are well able to produce revenues and those who find that more difficult," he said Friday.
"We saw signs of this in the first quarter," he said, "and there will be probably be more in the second," when quarterly earnings are announced. "In coming months, this will increasingly be seen as a telling indicator."
Classifying Banks by Revenue
There are sharp differences even among top-drawer banks, he noted.
For instance, Norwest Corp. has recently produced doubledigit revenue increases, while the revenue growth is modest to flat at "otherwise fine companies" like Wachovia Corp., Sun-Trust Banks Inc., and NBD Bancorp., Mr. McDermott said.
For banks in the slow-revenue category, "it's going to put pressure on the return on capital," he said. "And there could well be adjustments in the stockprice valuations, with better diversified and revenue-producing companies receiving a better valuation."
The shock could be greatest for companies that have mostly grown by making acquisitions in the recent past, he said.
Ultimately, he said, the frustrations involved in achieving sustained revenue growth could lead to dealmaking.
Many more deals could be based on matching the strengths of banking companies to enhance revenue, he said. Until now, the overriding factors have been cost-cutting.
The merger this year of Society Corp. and Keycorp is the best example of this newer sort of merger, he noted.