Bank stocks rallied Wednesday on reassuring comments by Federal Reserve Chairman Alan Greenspan and a bullish report on the industry by a leading analyst.
The Standard & Poor's bank index gained 1.54%, to 528.75, while the S&P 500 rose 1.39%, to 801.90, after the Fed chairman softened his warnings about an overheated stock market.
At the same time, Henry C. Dickson of Smith Barney Inc. raised his price targets for 16 regional and money-center banks, projecting sustained 12% earnings growth for the sector.
"Right now, it looks like banks will create more value than the other guys," Mr. Dickson said, suggesting that investors will continue to find bank shares attractive, even at their current high prices.
In the morning, Mr. Greenspan told the National Association of Business Economists that stocks are not necessarily overvalued-as long as projections of corporate earnings hold up.
That sent equity prices sharply higher, with bank shares rising about twice as fast as the broader markets.
After a midday lull, the bank-led rally resumed on news that Mr. Greenspan started his testimony to the House Banking Committee with additional reassurances about the market (see story on page 2).
Mr. Greenspan said in written testimony, which was otherwise identical to that delivered last week to the Senate Banking Committee, that the Fed does not have "a firm view that equity prices are excessive right now or risk spreads patently low."
"It appears as if the worst fears haven't been realized," said Kevin Flanagan, money market economist at Dean Witter Reynolds, commenting on the afternoon surge in stocks. "He hasn't added anything additionally negative for the market."
The gainers included Citicorp, up $4 to $122.125. The bank was among the companies whose target prices were lifted by Mr. Dickson-to $150 from $125.
Also performing strongly were BankAmerica Corp., up $2.50 to $116.875; Chase Manhattan Corp., which gained $2 to $103.75; and SunTrust Banks Inc., up $1.625 to $53.
Mr. Dickson based his conclusions on an analysis of "economic value added" that showed a gradual sea change in the industry.
"You had an industry that destroyed value or hardly created value for 25 years, and now they're creating value," said Mr. Dickson, noting deregulation, new cost controls, and the evolution of many banks into financial services firms.
While some analysts agreed with Mr. Dickson's long-term conclusions, they said there could be some bumps in the road immediately ahead for banks, which remain sensitive to changes in interest rates.
"The short-term risk we have identified is grounded on the notion that the economy could be a touch stronger than most people anticipate," said Natwest Securities analyst Thomas D. McCandless. "It means you could get a sharp rise in the yield curve."
Indeed, some noted that, despite his more reassuring tone, Mr. Greenspan still appeared to be headed toward a rate hike to head off future inflation.
"I thought the message came through clearly," said Salomon Brothers economist Robert V. DiClemente. Mr. Greenspan, he said, "has been laying out a rationale for tightening before the fact."