Banking stocks may not be in favor with many investors right now, but they may reward more patient buyers as some of the best stocks of the decade. hat is the view of Elizabeth A. Summers, banking analyst at the regional brokerage firm Ryan, Beck & Co. in West Orange, N.J.

Ms. Summers thinks demographic and other factors will increase the savings rate over the next decade. The best-run banks are positioned to take advantage of that, she says.

She covers banks in New York, Pennsylvania, and New Jersey, three of the most populous states.

The area is recognized as likely to be a focus of banking industry consolidation. But Ms. Summers prefers banks with strong fundamentals and effective business strategies, not just takeover potential

Q.: Where are bank stocks headed for the rest of the 1990s?

SUMMERS: I'm bullish on bank stocks in general. Just as the natural resources stocks were the place to be in the 1970s and the consumer stocks during the 1980s, I think the financial services stocks are the place to be in the '90s.

Q.: What's behind your optimism?

SUMMERS: An outlook for a stable economic environment with low inflation, which is great for banks.

I also think we will see an increasing savings rate, something that has not been appreciated enough. The baby boomer generation is moving from the borrowers age category into the savers category.

We're also in transition away from the debt-building era in other ways. From World War II through the mid- 1980s we had a tax policy that favored debt. For the most part we also had rising incomes and, especially in the '80s, conspicuous consumption.

That has all changed. For the first time since the Great Depression, we are seeing massive white-collar layoffs. A fear of job loss sparks savings. And the trend looks permanent, not cyclical.

Of course, baby boomers will never have the savings rate of their parents. Their costs are too high. And we won't have the savings rate of Japan. But it will be a noticeable increase.

Q.: And that is bullish for bank stocks?

SUMMERS: Bullish for financial services stocks. The banks will have to go out and get their share of this business.

The days of sitting back and waiting for it to walk in the door are gone for good. The industry survivors will be those with entrepreneurial instincts and the strategies to get it done.

Q.: What about loan growth among banks you cover?

SUMMERS: Some of the banks are beginning to report some increase in loan growth. In New Jersey there is a feeling of cautious optimism about the economy. For one thing, real estate appraisals have stopped falling and have been flat for some time now.

But we are in a slow-growth environment. The emphasis is just not going to be on borrowing and debt.

Q.: Banks, then, must concentrate on being providers of financial services?

SUMMERS: Efficient and cost-effective providers of service.

One reason to like the banks is that they have become much more efficient over the last few years. Many banks' efficiency ratios [gross operating expenses divided by fully taxed revenues] have improved considerably.

Ratios up in the 60 percents used to be typical, while ratios in the 50 percents are rapidly becoming the norm. Look at First Fidelity [Bancorp., Lawrenceville, N.J.], which has now gotten its ratio down to the mid-50s. And PNC [Bank Corp., Pittsburgh] is in the low 50s.

But of course, they will not all be efficient operators. Those who are not will end up being bought by the banks who are.

Q.: Most of the banks you cover are in New Jersey, where there have been a lot of acquisitions this year. Do you recommend banks as takeover candidates?

SUMMERS: No. Because I can't tell you when a bank might be taken over, at what price, or even what a given management attitude about selling will be at a particular point in time.

Fundamentals are more important. If there's an acquisition, it is a sort of bonus. Where takeovers are concerned, I tend to focus much more on acquirers.

Q.: But there are still a lot of small banks left in the region you cover -- which is basically New Jersey, Pennsylvania, New York State. Aren't most of these banks going to be acquired?

SUMMERS: Many undoubtedly will, though probably not all.

I've seen it written that the small banks aren't going to survive. But I don't know what the minimal size is to achieve an acceptable level of profitability, and that seems to me the real point.

There are some community banks that are operating very effectively, and they are prospering. They do very well with the small-business sector, which is one of the last remaining profitable sectors for banks. A lot of those business loans are made above the prime rate, by the way.

The community banks are in a great position, because they know the local economy, the people involved. There is a role for them and a niche for them.

Again, it depends on if they've got the right strategy and are able to effectively implement that strategy.

Q.: What are the bases of your bank stock recommendations?

SUMMERS: A bank must have a visible revenue stream and a strategy that will keep revenues and earnings growing. I try to find banks whose earnings growth is faster than the earnings growth rate for the market as a whole, the Standard & Poor's 500.

Q.: What strategy do you like to see in banks you recommend?

SUMMERS: There are quite a few viable strategies, I'd say.

For example, Commerce Bancorp [Cherry Hill, N.J.] is basically a growth retailer that happens to have a bank charter.

Others, like First Fidelity and BB&T [Financial Corp., Wilson, N.C.], are very smart acquirers and achieve revenue growth that way.

Q.: What about turnaround stories?

SUMMERS: There are just a few left -- Midlantic [Corp., Edison, N.J.] and BMJ Bancorp. [Bordentown, N.J.] are turnarounds.

But the long period when earnings growth at banks was being pushed along by improvements in asset quality and reductions in the costs related to this, as well as the wider [net interest] margins from falling interest rates, are just about completely finished. Some banks in California may still be in this category, of course.

Q.: BB&T Financial is your favorite bank. Why?

SUMMERS: They are a super community bank. They operate in North Carolina, which long has had statewide branching, and they have always had to compete against what now are regarded as some of the best banks in the business.

They're the fourth-largest bank in North Carolina, behind NationsBank Corp., First Union Corp., and Wachovia Corp. They also have a strong corporate culture that goes back many years. They are in some respects an early-state Banc One.

Q.: How are they like Banc One?

SUMMERS: Their earnings have been growing every year for at least a dozen years. They just increased the dividend for the 17th consecutive year. They have a young, dynamic management team, and they have grown through very shrewd acquisitions.

They were among the first, if not the first, commercial bank to expand by acquiring thrift institutions. They also have a no-lay-off policy that has created tremendous loyalty among their employees.

Q.: What are your thoughts about First Fidelity?

SUMMERS: They have a tremendous management team.

Their chief executive [Anthony P. Terracciano] has a stated objective of ultimately expanding his bank from Baltimore to Boston and is already on the way. They already have an impressive share of the market in the affluent suburbs around New York. And they are eventually going to be a tremendous competitor for those community banks.

It is curious that they've been so beaten up in the stock market, because all the news is good, and all the fundamentals are there. Their stock has been selling below its yearend price. It seems like an obvious buying opportunity.

Q.: What about Collective, a thrift institution?

SUMMERS: They look so much like a bank, but they still have the advantages of a thrift charter. They can and have branched interstate. They are are another shrewd acquirer. They just bought Montclair [Savings Bank] for 80% of book value.

Q.: You also like Sovereign, another thrift. Are the reasons basically the same?

SUMMERS: Yes. I especially think longer-term-oriented investors will be rewarded with their stock.

They surely must be at the top of the industry in the number of times they have increased the cash dividend and declared either stock dividends or splits.

They have expanded very effectively from their Pennsylvania base into New Jersey.

Q.: You mentioned Commerce Bancorp as being basically a retailer?

SUMMERS: They follow the McDonald's strategy. The branches look alike and are immediately identifiable. They have the longest hours of probably any institution in the industry. And they get results; deposits grew by an amazing 22% last year.

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.