No sector in the stock market has benefited more from falling interest rates than the banking industry. But some analysts are warning that any additional declines might backfire.

The reason: Many banks assuming rates recently hit their lowest point, have positioned themselves for a gradual rise in money market rates late this year into next year.

But short-term and long-term rates fell Monday, apparently in response to congressional passage of President Clinton's economic program over the weekend.

Long Bond at New Low

The benchmark 30-year Treasury bond hit a new low. In afternoon trading, its yield was at 6.47%.

If the trend continues, "there will be unpleasant consequences for bank inventors," said Stephen Berman of NatWest Securities Corp.

Mr. Berman and a handful of analysts who share his views remain in the minority. Indeed, bank stocks rallied Monday along with the rest of the market.

But these analysts are convinced that banks have already derived all the possible benefits of falling rates

"The wearing out of the funding advantages and credit quality improvements carried over from 1992 is an increasing threat to bank earnings,' he noted.

During the past two years, as the cost of funds fell faster than earning assets were repriced, bank net interest margins widened to record levels and industry earnings blossomed.

But now further declines in rock-bottom deposit rates seem remote. So the consequence of fresh declines in money market rates would be a decline in net interest income as return on earning assets fall.

Rate stability would also put pressure on margins as the slow pace of asset repricing catches up with lower cost of funds, Mr. Berman said.

Analysts at Lehman Brothers noted that the median net interest for banks contracted 3 basis points during the second quarter to4.86%. Asset yields dropped more quickly than deposit costs,"they said, especially yields on investment securities portfolios.

Mr. Berman said that for many banks balance sheets, the best possibility would be a moderate rise in rates. That would help maintain rate margins by blunting the repricing of assets.

But there is also the risk that rising rates might deal a blow to the stock market that would surely hit bank shares.

"Should the market suffer a setback, it could quickly reveal that bank stocks are ripe for profits taking," Mr. Berman warned. He urged clients to focus on money-center banks with global funding and trading capacities whose earnings have not reached full potential- Citicorp, Chase Manhattan Corp., and Chemical Banking Corp.

Other analysts are less worried about the consequences for banks from rate movements.

Margins, a key ingredient of bank earnings, should remain wide for several reasons, Lehman's analysts said. Not only do assets reprice slowly, but loan growth is finally growing with prospects for new assets.

Meanwhile, banks are "awash in liquidity " and will not have to compete for deposits to fund loan growth. Finally, competition has shrunk because of mergers and regulatory supervision of "irrational competitors."

Mary P. Quinn, an analyst at Keefe, Bruyette & Woods Inc., said that investors concerned with the near-term outlook for margins ought to "shake off their exaggerated interest rate anxieties and pay more attention to the improving fundamentals intrinsic to the industry."

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