The year now ending gave bank stocks a wild ride.

Well into last summer, bank issues defied the market's conventional wisdom and outpaced most other stocks despite steadily rising interest rates.

"It was a lot of fun during the first half of the year," said Anthony Davis, regional bank analyst at Dean Witter Reynolds Inc. "Then the music stopped."

Since September, bank stocks have been mired in a classic bear market. Earnings estimates and investment ratings have fallen amid worries about the impact of higher rates on banks' net interest margins and securities portfolios.

Shares of some of the biggest names in the industry have been hammered this year.

The industry's top loser in stock price through last Wednesday was Bankers Trust New York Corp., down a steep 29.5% for the year on derivatives-related fears.

Winners and Losers

85 banks with assets of $5 billion or more at Dec. 1325 banks with greatest Year Threestock price gain to date month 1 Michigan National Corp. 30.43 2.04 2 Bank of Boston Corp. 19.57 1.85 3 Citicorp 17.29 -0.57 4 Wells Fargo & Co. 15.07 -0.50 5 Bank South Corp. 14.75 -6.67 6 First Chicago Corp. 10.98 0.79 7 SunTrust Banks Inc. 9.72 -0.50 8 First Bank System Inc. 8.54 -9.80 9 First Interstate Bancorp 8.38 -15.2410 First Tennessee National Corp. 7.14 -9.8411 Fourth Financial Corp. 6.41 2.8912 MBNA Corporation 6.18 9.2513 Mercantile Bancorp. 5.96 -15.5614 Union Bank 5.88 -10.7415 Bank of New York Co. 5.70 -3.6016 Star Banc Corp. 5.00 -13.2717 BayBanks Inc. 4.93 -6.9918 Deposit Guaranty Corp. 3.57 -10.0819 Hibernia Corp. 3.23 -1.5420 Chase Manhattan Corp. 2.58 -2.8021 Compass Bancshares 2.27 -7.2222 UJB Financial Corp. 2.08 -10.9123 Mercantile Bankshares Corp. 1.64 -10.6324 National City Corp. 1.53 -8.2925 Midlantic Corp. 1.47 -10.3925 banks with greatest Year Threestock price decline to date month 1 Bankers Trust New York Corp. -29.54 -16.95 2 Banc One Corp. -27.95 -18.97 3 Onbancorp -27.76 -11.74 4 State Street Boston Corp. -22.00 -21.74 5 PNC Bank Corp. -21.98 -16.20 6 Shawmut National Corp. -20.11 -22.35 7 J.P. Morgan and Co. -20.00 -9.57 8 First of America Bank Corp. -19.43 -11.85 9 Union Planters Corp. -17.91 -17.9110 BB&T Financial Corp. -16.92 -6.7511 Signet Banking Corp. -16.91 -20.3412 Marshall & Ilsley Corp. -15.34 -2.4413 First American Corp. -14.84 -18.9614 AmSouth Bancorp. -14.40 -15.0815 Keycorp -13.99 -19.8416 UMB Financial Corp. -12.73 -8.4617 BankAmerica Corp. -12.67 -13.1418 Northern Trust Corp. -12.62 -6.1019 Firstar Corp. -12.60 -12.6020 Premier Bancorp -11.97 -8.7621 First Security Corp. -11.54 -21.3722 Boatmen's Bancshares -10.88 -14.4623 U.S. Bancorp -10.50 -16.3624 First Commerce Corp. -10.45 -17.4325 West One Bancorp -10.31 -15.14

Source: SNL Securities

The stock got some relief Thursday after the bank reached a settlement with the Securities and Exchange Commission and the Commodity Futures Trading Commission concerning its derivatives business. It agreed to pay a civil fine of $10 million and reform some of its procedures.

But Bankers Trust has hardly suffered alone. Venerable J.P. Morgan & Co. is off 20%.

Among the superregionals, once invincible Banc One Corp., Columbus, Ohio, is down nearly 28%, with most of the damage done during the past three months.

State Street Boston Corp., regarded by some as the industry's premiere "growth stock" because of its fee-based revenues, has slipped 22%.

In the relatively small winners circle, shares of Michigan National Corp., Farmington Hills, Mich., gained more than 30% as some irate shareholders tried to force a sale of the company.

Also bucking the downdraft, Bank of Boston Corp. shares are up 19.6%; Citicorp, New York, 17.3%; and Wells Fargo & Co., San Francisco, 15%.

Wall Street's analysts, many of whom are considerably less upbeat about banks now than six months ago, are approaching next year under a yellow flag.

Some, including Mr. Davis, offer reasons for optimism.

"We've still got some pain to go through, but the bank stocks have already discounted a lot of bad news," he pointed out during a conversation earlier this month.

"If the economy begins slowing in the spring and some of the pressure comes off short-term rates, banks could then look pretty good, with earnings growth of 10 to 11%," he said.

Like nearly everyone else, Mr. Davis is expecting further rate increases from the Federal Reserve early next year. He has tried to put that in perspective.

"We looked at the last six rate cycles, beginning in 1970, and assumed rates began a normal cyclical upswing in October 1993," he said.

"History repeating itself would put fed funds around 7% or a little higher by June of 1995," up from 3% at the beginning of this year, before the Fed began its yearlong credit-tightening campaign.

Fed funds is the interest rate on overnight loans of bank reserves.

It is the shortest-term interst rate in the credit markets and by far the most sensitive rate controlled by the Fed itself.

"We tried to assess what that would mean for the banks that we follow," Mr. Davis said. "We found they would still look attractive, but it's a question of getting through the next few months. We expect the going to be somewhat bumpy for a while."

And there may be more good news for banks next year than expected, Mr. Davis said. For instance, a possible rollback of Federal Deposit Insurance Corp. premiums is not factored into bank earnings estimates right now.

Another analyst, Thomas D. McCandless of PaineWebber Inc., also thinks banks may do respectably well next year, particularly from next summer on.

"Maybe it's my contrarian streak, but I think we could see the bank group bounce despite the fact that fundamentals are typically difficult for this point in the cycle," he said.

Earnings comparisons are the reason. "For the first time in two years, we have a rather dramatic slowdown in S&P 500 earnings coming our way," he said.

"It looks like the S&P is going to grow like gangbusters, at around 17% [year over year], in the first half of 1995," he said. "Then in the second, it falls off a cliff because comparisons will be difficult."

Bank earnings, growing at a 10% or 12% clip, could then look good by contrast. Coupled with a more stable bond market, "it's not immpossible to imagine a rally," Mr. McCandless said.

He said he feels interest rates and relative earnings strength are the two biggest drivers of stock prices. "They've been working against banks for a year and a half, but that could change next year."

Mr. McCandless acknowledged, "There is clearly a lot of risk in this scenario because the economy has a tremendous amount of underlying momentum."

Others, such as Sandra J. Flannigan of Merrill Lynch & Co., expect 1995 to be "a far more challenging year" than this one. "We expect a 'winners and losers' shakeout among banks," she said.

"The market to date has painted all regional banks with the same brush, but it is going to be increasingly evident next year that not all banks are created equal," she said.

"Those banks that can show consistently above average revenue and earnings growth and superior return on equity will ultimately be singled out by the market [and] accorded differentiated valuation," she said.

Top regional bank "buy" ratings from Merrill Lynch right now go to First Union Corp., Charlotte, N.C., and Fleet Financial Group, Providence, R.I. "Above average" ratings are held by Norwest Corp., Minneapolis, and First Interstate Bancorp, Los Angeles.

"We still want to own banks, but we are in a very selective mode," said Ms. Flannigan, who is not counting on a stellar year for banks in general.

The analyst said any near-term "bounce" in the bank stocks is best used by investors to sell the laggards and focus their portfolios on the industry's best performers.

"In past periods of yield curve compression, the banks have tended to have short-term bottoms compared to market a few months prior to the peak of yield curve flattening," she said.

Historically, they tend to underperform other stocks once the peak of rates is reached, she said.

The yield curve is the line traced by market rates among various maturities of Treasury securities. As the Fed raises shorter-term rates to brake the economy and cool inflation, longer-term rates stabilize, and the curve is said to flatten.

A flattened curve often signals the onset of a recession, which in turn leads investors to worry about problem loans at banks. But lending problems are not on the horizon yet, most analysts think.

So when to buy bank stocks again?

Kathryn H. Bissette, an Atlanta-based analyst for Sterne, Agee & Leach Inc., thinks the bottom in bank stocks will come "relatively early in 1995, near the end of the first quarter or early second quarter."

The bottom will be signaled to investors by bank stock yields, she thinks. At the trough, they may reach an average of 5.5%, up from 4.5% now. That assumes a fed funds rate reaching 6% and the 30-year Treasury "long bond" yield hitting 9%.

Then the overall environment should start to improve for bank stocks, she said, although the strong momentum of the economy may not begin to recede until late next year.

But there will be a need for buyers to rush back in, Ms. Bissette and other Sterne Agee analysts believe. In bear markets of the past, going back to 1969, "two or three bounces on the bottom have always provided plenty of time for buying."

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