Despite strong earnings reports, bank stocks declined with the rest of the market last week. The American Banker 225-stock index fell faster than the Dow Jones industrial average, which by Friday afternoon was off almost 5% for the week.
But bank analysts' outlooks for the rest of the year remained favorable.
Analysts attributed the stock falloff to retail investors' fleeing the sector and noted that prices did not totally collapse amid warnings from Federal Reserve Chairman Alan Greenspan about inflated stock values and the soundness of the economy.
The second-quarter reports showed that the biggest banks sidestepped concerns about the Asian economic crises, declining credit standards, and a flat yield curve.
Earnings increased an average 12% at the 110 top banking companies tracked by Keefe, Bruyette & Woods Inc. Earnings at the Standard & Poor's 500 companies have grown only 4% this year.
Analysts remain fairly optimistic about big banks for the rest of the year, even with the bull market showing signs of age, because loan quality is good and even appears to be improving in credit cards and other types of consumer debt.
"The second quarter reconfirmed trends we've seen for a long time," said Lawrence W. Cohn, a banking analyst at Ryan, Beck & Co. "The large banks posted no major disappointments, but traditional thrifts and community banks had real problems."
Those latter institutions, under increasing competitive pressure and strained by the mortgage-refinancing wave (see related article starting on page 1), are seen as likely targets for the next wave of consolidation.
According to Keefe Bruyette, net interest income grew only 2% in the second quarter, but noninterest income-the fees so many bankers are now stressing-grew by 27% at the 50 biggest banks.
"The big banks are showing they can earn their way through problems," said Thomas H. Hanley, a banking analyst at Warburg Dillon Read.
Noninterest income at the top 50 banking companies now averages 42% of total earnings, up from 28% five years ago, providing a cushion from interest rate cycles that can cause bottom-line volatility.
The second quarter's results supported an evolutionary view of market structure espoused by a number of industry watchers, with the emergence of a handful of highly profitable big banks, another profitable segment of smaller banks, and less definition in between.
Though no companies reported major problems, some reported higher-than- expected expenses, with Citicorp and Banc One Corp. raising some eyebrows.
David S. Berry, director of research at Keefe Bruyette, said the cost factors included computer conversions related to the year-2000 problem and European Monetary Union.
Many banks also boosted their earnings by selling securities. These one- time gains are not looked upon favorably by most investors, but defenders of the banks said most were selling bonds to exploit the yield curve or were shedding mortgage-backed securities to avoid getting hurt by refinancings.
"If you were a large investor in mortgage-backed securities, you wanted to sell them as fast as you could," said Mr. Cohn.
Although federal regulators have raised flags about credit quality, analysts said there were no signs of deterioration in second-quarter numbers. Nonperforming assets on bank books are unchanged from a year earlier, Mr. Berry said, and with credit card delinquency rates falling, credit card chargeoffs could start to decline soon too.