Bank stock investors were jumping snip last week, frightened at the prospect of another surge in interest rates.
Bank stock prices fell significantly more than other stocks did last week as investors grew increasingly fearful that another round of credit tightening by the Federal Reserve is imminent.
It could happen as early as Tuesday when the central bank's powerful Open Market Committee meets in Washington to review the nation's business conditions and its own monetary policy.
In the five trading days through last Thursday, the American Banker index of 225 bank twice as bad as the 2.04% decline in the Dow Jones industrial average.
"It was a truly ugly week," said Nancy A. Bush, regional bank analyst at Brown Brothers, Hamman & Co., New York.
"The question in investors' minds and for bank managements has become not whether or when rates are going up again but how high they are going," she said.
Ms. Bush noted that most of the damage suffered by bank stocks had been among some of the most visible in the industry, such as NationsBank Corp., Keycorp, Fleet Financial Group, First Union Corp., and Banc One Corp.
"It tells us that until recently there was still some hot money, still a momentum play in some of the individual bank stocks, although not in the bank group as a whole," she said.
Hardest hit was NationsBank, down 9.16% in value in the five days through Thursday. Bane One shares were down 6.75% in value for the same five trading days.
Money-center banks were hun as well. J.P. Morgan & Co. was down 5.5%, and Citicorp was off 3.3% in the .same period.
The downturn continued into Friday's market. In late trading, NationsBank was down 87.5 cents a share, to $47.50, Barnett Banks Inc. was off $1, to $44; Northern Trust Corp, was down $1.25, to $36; and CoreStates Financial Corp. was off 50 cents, to $27.375.
Investors' wariness about banks right now is based on several factors. Some worry that banks need to produce more revenue if they are to sustain the earnings momentum they enjoyed as they recovered from asset problems of a few years ago.
Foremost in investors' minds, however, is the ingrained Wall Street wisdom that banking stocks should be sold in favor of industrial stocks when rates are rising. The reasoning is that nonfinancial companies will show better earnings in that part of the business cycle.
That precept has come under pressure this year as bank earnregs have continued to compare fairly well with other companies', in part because banks have quickly matched the Fed's rate hikes with rate increases for their borrowers.
But many industry observers are skeptical that banks will be able fully to match further rate increases. Even if they d0, belowmarket rates being paid depositors may finally be forced upward, raising the banks' cost of funds.
That, in turn, would narrow the highly favorable net interest margins that have been major contributors to gains in bank earnings.
Some Wall Street economists are expecting significant further rate increases.
"I expect a 50-basis-point hike in the federal funds rate at the [Tuesday] meeting of the open market committee and another 50-basis- point hike at the Nov. 15 meeting," said Edward Yardeni, chief economist at C.J. Lawrence/Deutsche Bank Securities Corp., New York.
Mr. Yardeni said in his latest weekly report that there also is an outside chance the funds rate could be pushed even higher.
"'Indeed," he said, "I wouldn't be surprised if one of the hawks at the meeting starts a debate about raising the rate by 100 basis points."
Mr. Yardeni criticized the Fed's credit tightening actions since they began last Feb. 4. "I didn't think at the time, and I still don't believe, that the forces of inflation will launch a cyclical assault on the economy," he said.
Others share his view. "A Fed fuming is unwarranted," according to Philip Braverman, senior vice president and chief economist at DKB Securities Corp., New York, who thinks the central bank will hold its fire Tuesday.
The Fe.d, he asserted in a report issued Friday, is misreading the significance of recent increases in commodity prices and some recent economic indicators, particularly the utilization rate of manufacturing capacity.
"There is far more global slack in output capacity and labor than suggested by U.S. data," Mr. Braverman said.
Another economist, Mickey D. Levy, also thinks the Fed is unlikely to act Tuesday, but in contrast to Mr. Yardeni and Mr. Braverman, he said he believes the central bank has justification for further rate increases. "The economy is still gaining strength," said Mr. Levy, chief financial economist at NationsBanc Capital Markets Inc., a nonbank subsidiary of NationsBank. "We are still moving ahead on the tail winds from the Fed's two years of accommodative policy" before the credit tightenings that began last winter, he said. "It would be very hard and not very productive, to try to predict what they will do on Tuesday," Mr. Levy said. But he added that he thinks the Fed's monetary policy panel will wait until its November meeting to act.
NationsBank, 1st Tenn.
NationsBank Corp. and First Tennessee National Corp. both agreed to fill-in acquisitions last week.
NationsBank, which is based in Charlotte, N.C., said it would buy Miami's Consolidated Bank to broaden its reach into south Florida's large Hispanic market.
Consolidated Bank, with $600 million of assets and 12 branches, primarily serves Hispanic customers in Dade and Broward counties.
"It helps us further penetrate the Hispanic market and also increases our franchise in Miami," said NationsBank executive vice president Aldolfo Henriques.
Terms of the deal were not disclosed.
It is expected to be completed by yearend, pending regulatory approval.
Consolidated Bank is owned by a U.S. holding company, Consolidated Bankshares Inc.
The latter in turn is largely controlled by a Venezuelan national, Jose Alvarez-Stelling.
Mr. Alvarez-Stelling had been a major shareholder in Banco Consolidado, which was recently taken over by the Venezuelan government.
Mr. Adolfo Henriques said the Banco Consolidado controversy would have no effect on NationsBank's purchase of Consolidated Bank.
"What we're acquiring is a bank from a U.S. holding company," he said.
Meanwhile, First Tennessee, which is based in Memphis, said it would purchase Community Bancshares of Germantown, Tenn., for $61 million in stock, or 2.7 times book value.
Community Bancshares is the holding company for Community First Bank, which has $256 million of assets and nine offices in Germantown, Memphis, Bartlett, and Collierville.
First Tennessee said it expected to complete the transaction by the first quarter of next year.
NationsBank is the fourthlargest U.S. bank, with assets of $164 billion.
It operates the third-largest bank in Florida, with $23 billion of assets.
First Tennessee, with assets of $10.2 billion, is the largest bank in the Volunteer State.