stocks to longtime investors, and also attracting generalists who go where the action is. Overall institutional investment in the top 50 banking companies rose by $10 billion, to $341 billion, during the fourth quarter. (See tables chart on pages 28 and 29). And money managers say this year's deluge of merger deals is spurring more buying. "We love the sector," said Philip J. Orlando, chief investment officer with Value Line Asset Management, a broad buyer of equities. "Consolidation is creating multiple opportunities." Bank stocks have become "the biggest holding in our portfolio" over the past few months, said Jeffrey Applegate, chief investment strategist at Lehman Brothers. Banks' shares are especially appealing as once-hot industries, including telecommunications, cool down, and even longtime bank stalwarts admit to being affected. "You look for value, attractive fundamentals, and more than ever, consolidation prospects," said Thomas Finucane, a portfolio manager with John Hancock Funds, one of the biggest buyers of bank stocks. The Boston money manager has more than $7 billion in bank stocks, including $4.9 billion in the 50 largest holding companies. Mr. Finucane noted that bank stocks have traditionally traded at a discount to the market, but said merger momentum may soon change that once and for all. The biggest stake in the top 50 holding companies was held by Fidelity Management - $22.5 billion. The Boston money manager also had the third- largest increase in its bank holdings, with $1.145 billion invested during the last three months of 1997. Barclays Bank was second-largest holder, with $19.8 billion of bank stocks, after a $797 million net increase. Capital Research and Management Corp., a mutual fund company that invests in a broad array of equities, found itself drawn to banks. It doubled its stake to $12.7 billion between the third and fourth quarter. Bank stocks are also getting a lift because they are components in various indexes that companies like Vanguard use to make investment decisions. Citicorp remains the market's favorite pick. Institutional investors held $36.9 billion of the bank's stock at the end of the year. The company's merger agreement with Travelers Group this month has further fueled the stock's popularity. Chase Manhattan Corp. was second, with $32 billion of its shares held by institutional owners at the end of 1997, and BankAmerica Corp. third, with $29 billion. The raging bull market and investors' search for undervalued stocks added to the stampede into bank shares. But industry observers expect even more money to pour in because of the merger mania in the sector. "Everyone is changing the way they look at the companies," said Joseph T. Capone, bank portfolio analyst at Hamilton Advisers Ltd. "They're all positioning for the next two to five years. It just drowns out everything else." The people who advise institutional investors find themselves doing double duty. Aside from evaluating the latest crop of earnings, analysts are picking out stocks that appear best suited for takeover and a resultant jump in share price. For instance, Credit Suisse First Boston had pegged First Chicago NBD Corp. as one of its most recommended stocks. The assessment was borne out by First Chicago's jump in share price after an agreement this month to merge with Banc One Corp. Now, Fleet Financial Group holds a recommended slot at Credit Suisse First Boston, and more of the firm's investment dollars. "We don't sit on our hands," said Michael Mayo, one of the firm's chief banking analysts. "We took the money out of First Chicago and put it into Fleet." Meanwhile, Mr. Mayo scouts for the next likely deal. "There is more to go with consolidation, and that has positive ramifications for bank stocks," he said. Indeed, money managers say they must be nimble to avoid lagging the pack. "We can't get caught holding names that aren't going to move," said one fund manager who last week sold some long-term holdings to invest in takeover targets. Aside from some large banks pegged as survivors, money managers are looking at takeover targets from a midsize crop that has never been more ripe. "There is a world of opportunity in regional banks and thrifts that are established in areas that large banks want to enter," said Joseph V. Battipaglia, chairman of investment policy at Gruntal & Co. But some are watching from the sidelines, saying that hot money is driving the market. "Fundamentals are out the window right now," said one money manager. "It's all about matching merger partners." To veteran bank investors, the situation creates challenges, as bank stocks rise on almost a wholesale basis. The Hancock Funds will be very selective in making new investments this year, Mr. Finucane said. "We'll be picking things up here and there, but mostly we'll shift things around as opportunities present themselves." He will look for "above-average banks trading at average multiples." The institutions include First Tennessee National Corp., whose focus on fee income makes it among the more appealing choices, he said. The Hancock Funds are also monitoring Fleet Financial Group and KeyCorp, two companies with challenges, but also profit potential, Mr. Finucane said.

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