By the usual way of looking at things, bank stocks ought to be losing altitude.

Banks typically start to feel the squeeze of deteriorating credit quality at this point in the economic cycle. In reaction, their stocks start slipping behind the overall pace of the stock market.

But banks are continuing to gain altitude-indeed, as a sector of the market they have rarely been higher. That has prompted Wall Street's industry watchers to search out what makes things different this time.

In a word, efficiency, according to the analysts at Dain Bosworth Inc., Minneapolis, who see continuing bright prospects for banks.

During the 1990s, efficiency ratios-in the simplest terms, a measure of the amount of money banks spend to make money-have declined at large and small banks. (see chart).

And this, said Dain Bosworth managing director R. Jay Tejera, means there is now a "disconnect" between banking and the periodic economic downturns and credit-quality problems that in the past have hurt bank stocks.

Moreover, he dismisses the belief held by many analysts in the investment community that cost cutting by banks is going to become more difficult in the future because the most obvious decisions have been made.

"The easy cost savings are yet to come," Mr. Tejera said in a conversation last week. "The industry has been too timid about downsizing all the bricks-and-mortar, but that is changing."

The savings will also come from technology that creates lower costs of delivery for bank services. He cites as evidence the growing consumer acceptance of automated teller machines, telephone banking, and banking via the Internet.

This acceptance will enable banks to accelerate branch closings and eliminate major chunks of overhead expense. Within five years, he expects as many as 50% of all bank branches will be gone.

ATMs account for 26% of all transactions, up from only 8% in 1993, he noted. As the percentage of the population accustomed to doing their banking in person dies out, ATM use should continue to grow.

And since an ATM deposit or withdrawal costs a bank only 25 cents per transaction, compared to an estimated $2 at the teller, Mr. Tejera says ATM use will provide a substantial source of savings.

Similarly, telephone banking may be impersonal, but it is an inexpensive way to make loans once the system is up and running.

It costs Minneapolis-based First Bank System Inc. only one-quarter as much to issue a loan through a call center as a branch. First Bank, as well as U.S. Bancorp of Portland, Ore., handle 60% of their loans this way now, Mr. Tejera said.

Other banks will be goaded to follow, he said, although he emphasized that getting the call-center operation going is not cheap. Banks must spend on technology to provide lenders the information they need on callers right away.

The number of bank branches in supermarkets is set to grow significantly as well, the analyst said. Not only are they cheaper to operate than branch offices and attract more people, but there are fewer supermarket locations than good bank locations, he said.

Mr. Tejera said that means a bank like Wells Fargo & Co., which has invested heavily in supermarket bank branches, is likely to face far fewer rivals trying to break into its niche.

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