Their cup runneth over.

Banking and thrift stocks advanced to new heights during the first half of the year with half the nation's top 50 banking companies outpacing the bull market.

Strong earnings growth in an ideal economic climate combined with a hefty dose of takeover speculation was an elixir that investors couldn't resist.

Among the major banks, shares of Boston's State Street Corp. took top honors with a 43.1% gain in valuation that was more than double the 19.5% rise in the Standard & Poor's 500 stock index.

The American Banker index of the nation's 225 largest publicly traded banks rose 27.1% during the first half.

And if banks did well, the thrift industry did better, with 18 of the top 25 thrift companies outperforming the bull market in price appreciation. Over all, the thrifts rose 30% in the first half.

Perhaps most indicative of the trend was the performance of Roslyn Bancorp. The New York thrift went from mutually owned to public company, debuting in January at $15.875 and then rising 44.1% to $22.875 by June 30.

Roslyn's initial public offering was oversubscribed, "so you have pent- up demand pushing up the stock," said Kevin T. Timmons, an industry analyst at First Albany Corp. "Plus, people think the thrift will start a stock buyback program soon because they have lots of capital."

Nevertheless, he said, "the stock is relatively inexpensive as a percentage of book, and there's lots more consolidation to be done in the New York metropolitan area."

The two big Cincinnati banks, Star Banc Corp. and Fifth Third Bancorp, confirmed a trend by investors toward placing premiums on solid performance.

Neither bank is flashy, but they consistently meet or exceeded earnings estimates, and both stocks have soared this year. Star is up 38.0%, and Fifth Third has risen 30.6%.

Star trades at 19 times earnings, while Fifth Third trades at 22.4 times-among banks a level matched only by State Street, which Wall Street rewards for its lucrative securities processing business.

"Neither bank hits a lot of home runs; it's a lot of singles," said industry analyst Joseph C. Duwan of Keefe, Bruyette & Woods Inc.

And neither bank has expressed interest in being taken over-indeed any such effort would be very expensive. But in this age of consolidation, takeover speculation seems built into the price of nearly every bank and thrift stock.

"We've seen enough takeover stories come true," that it's a factor, said Thomas Lefebvre, portfolio manager at Phoenix Duff & Phelps.

This helps explain why banks were able to regain all the ground they lost after the Federal Reserve raised interest rates in March, temporarily dampening investor enthusiasm for the stocks.

Takeover speculation gets added currency because banks nowadays are careful to make deals that they tell investors will boost earnings within a year.

And banks that don't do what they say get punished. Wells Fargo & Co., which has had ongoing problems absorbing First Interstate Bancorp, was the only bank in the top 50 whose share value fell during the first half. The loss was minuscule at 0.1%, but still glaring amid the gains elsewhere.

Investors also appreciate that banks use their capital to buy back stock when they are not doing the big deal. Stock buyback programs, or even the possibility of them, are enough to help bank stock prices.

"The rational use of excess capital has become a key to this business," said Mr. Lefebvre.

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.