A selloff in Citicorp stock last quarter caused the market value of the top 100 banking companies to drop for the first time since 1990.
The largest bank holding companies in terms of market capitalization saw their values dip by an average of 0.79% from the second quarter, according to American Banker's quarterly survey.
But if Citicorp's $2 billion drop is excluded - the company lost more than one-fourth of its value amid a stream of bad news - the rest of the top banks managed a 2% gain in the quarter. In the second quarter, the group gained a robust 11.4%, bolstered by a rally in stock prices and record sales of equity by banks.
For most of the bank group, the flatter growth occurred because investors took profits in stocks that had big run-ups earlier in the year - Chemical Banking Corp., Chase Manhattan Corp., Bank of Boston Corp., and Shawmut National Corp.
"The banks that dropped off the most were the cyclical turn-arounds," said Dennis Shea of Morgan Stanley & Co. "They had the greatest run-up in share price in the first half and then lost ground in the third quarter."
The interest rate environment is also depressing market values. Many analysts think low short-term rates, which have cut bank funding costs and bolstered net interest margins, are near their nadir.
Market capitalization, found by multiplying a company's stock price by its shares outstanding, measures a bank's overall strength and ability to acquire others.
Last quarter's drop represented the first step backward for the group since the third quarter of 1990. The following quarter, investors began to shrug off the initial scare about credit quality that had sent bank stock prices plunging.
Bank stocks began to rally in earnest in the fourth quarter of 1991, after the Fed unleashed a series of interest rate cuts to stimulate the economy.
Citicorp's stock was under siege most of last quarter. Its announcement in August of plans to issue convertible preferred stock set off fears of earnings-per-share dilution.
In September, a regulatory memo highly critical of its mortgage banking operations was leaked to the press. This was followed by rumors that large institutional holders were dumping Citicorp stock. In all, the shares dropped about 26% in the quarter.
More bad news came this quarter, as the company announced that its third-quarter earnings would be substantially lower than analysts had predicted. Moreover, it announced the sudden departure of its No. 2 executive, Richard Braddock. These events have further depressed the company's market value this quarter. Even with the slide, however, Citicorp remains the sixth largest banking company in market value.
No Lack of Confidence Seen
Money managers and analysts said the drop in market value did not signify a lack of confidence in the industry.
"The market rotates from one sector to another - banks have done well, and the group that acts the best gets sold," said James Goff, a portfolio manager with Janus Capital Corp., a Denver money manager.
Big investors favor banks with market values of at least $1 billion. At this size, there are usually plenty of buyers and sellers in a stock. No bank lost so much ground last quarter that it knocked itself out of this group.
The more important fact for investors is the 22% gain in market value for the top 100 banks this year.
"The third-quarter drop isn't a big event at all," said Dennis Shea, an analyst with Morgan Stanley & Co. "It's indicative of the performance of the bank stocks in the third quarter. They've had a good year to date and have just given up some ground in the third quarter."
Despite a small drop last quarter. BankAmerica Corp. retained the lead in market capitalization, with $14.9 billion.
J.P. Morgan & Co. moved into second place, pushing past NationsBank Corp.,
which fell to third place after a 6.8% drop.
Morgan, which rose 11%, made its move into second place on the back of an increase in its stock price, as investors bought into high-quality banks and sold off shares of turnaround banks.
Morgan was one of only three of the top 10 banks that rose in market capitalization in the third quarter. Bankers Trust New York Corp., up 8.5%, and Norwest Corp., up about 2%, were the others.
Despite a 2% fall, Banc One Corp. remained in fourth place, at nearly $9 billion. The Columbus. Ohio, company is, however, poised to move up. It has several big acquisitions pending, which will require the issuance of stock.
Analysts said the drop in market value contributed to the slowdown in bank merger activity. The value of new bank merger deals fell 24% in the third quarter, an earlier American Banker survey found.
"There was a psychological effect," said Thomas Brown of Donaldson, Lufkin & Jenrette Securities Corp.
"Sellers get a price in their mind. But buyers purchase with stock, which is a currency that fluctuates. So when there's a decline in stock prices overall, it affects the level of merger activity. It shouldn't, but it does."