First Boston sees bright prospects for bank issues through '96.

The banking industry's excellent third-quarter earnings show that investor fears about bank stocks are unfounded, according to veteran Wall Street analyst Thomas H. Hanley.

Mr. Hanley said a close look at the pattern of loan growth in recent quarters undercuts the concern of some analysts that the economy is approaching the point of overheating.

Rapid loan growth in a runaway economy would cause interest rates to escalate amid sharp credit tightening by the Federal Reserve Board. That nearly always means poor market performance by bank stocks.

The increased rate of lending in the second and third quarters, however, can be attributed almost entirely to money center and California banks, Mr. Hanley said. The rate of growth in lending for regional banks is strong, but virtually unchanged since March.

"It was a significant shift and it has been missed by a lot of people," said Mr. Hanley, a managing director at CS First Boston Corp., New York.

The loan pickup at large banks began considerably later than at their regional counterparts. In fact, loans at the big banks were still shrinking as late as last February.

The spreading of loan demand across the entire banking industry supports Mr. Hanley's contention that bank shares remain in a positive phase of what he terms the "wave theory of bank stock investing."

Analysts at First Boston see three distinct phases of the bank stock valuation cycle.

The first wave, a dramatic upswing in stock prices, is usually propelled by a sharp reduction in interest rates. That happened in 1991 and 1992.

The initial wave initially gives way to a fallow period of about a year as nervous investors hunt for signs of fresh loan volume and scrutinize bank earnings for signs of strength or weakness.

A second advancing wave is triggered by the evidence of loan demand. It gathers momentum as loan volume accelerates and bank stocks again outperform other stocks.

Finally, a third wave, this one a pullback in bank stock prices, occurs as the economy overheats. This is characterized by meaningful increases in both inflation and interest rates, restrictive Fed monetary policy and increased problem loans at banks.

"Some people think we're already in the third phase, meaning that bank stocks should be sold," Mr. Hanley said. "But we continue to think we are still firmly in phase two."

Based on that favorable outlook, as well as recently slippage in stock prices, First Boston analysts last week issued "strong buy" ratings on BankAmerica Corp., NationsBank Corp., and Chemical Banking Corp.

Indeed, according to First Boston's economic forecast, the favorable second wave may extend through 1996 and into 1997.

Its economists think the gross domestic product will slow modestly next year from a revised 4% growth rate during the second quarter this year to 3% in the current quarter and to 2% by the fourth quarter of 1995.

At the same time, inflation is forecast to drop from roughly 3.8% in the last quarter to 2.7% in this quarter and to remain in the 3.0%-3.1% range throughout 1995.

"A couple of additional tightenings from the Fed, probably 50 basis points on the [federal] funds rate in November and February at that will be it," he said. "And by this time a year from now, there is a chance the Fed will even be considering loosening money again."

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