Monday was deja vu all over again for bank stocks.
A month to the day after a robust jobs report sparked a precipitous decline in bank stocks, the sector was again hammered by unexpectedly rosy employment data.
The stock market was closed Friday when the Labor Department reported March employment gains nearly three times higher than economists' estimates.
This all but dashed any remaining hopes that the Federal Reserve would cut interest rates, sending bond prices reeling. Bond prices perform well when interest rates are declining, but lose value as rates rise.
Stocks responded in turn Monday. The Standard & Poor's index of major banks, viewed by investors as interest rate sensitive, dropped 2.78%. The broader Standard & Poor's 500 fell 1.77%.
Analysts said they were not surprised. "It was almost like a knee-jerk response," said Sally Pope Davis, who tracks regional banks for Goldman, Sachs & Co. "When there is a really tough time in the bond market, then a short-term reaction is to be expected among the banks."
Banks' cost of funding rises amid higher interest rates, so investors traditionally leave the sector at these times.
The yield on the 30-year treasury bond rose from 6.67% to 6.82% during abbreviated trading on Friday; by mid-afternoon on Monday the yield had reached 6.91%. In mid-February the rate stood at 6.03%.
Money-centers and large capitalization regional banks fell hardest, as investors dumped the most liquid names.
Chase Manhattan Corp. fell $2.75 to $70.625, Wells Fargo & Co. fell $7.125 to $252, Banc One Corp. fell $1.50 to $35.25, and BankAmerica Corp. fell $2.75 to $76.
Not all analysts agree, however, that rising interest rates are bad for banks.
"If you study how banks make money, it is hard to come to the conclusion that interest rates hurt them," said David Berry, director of research at Keefe, Bruyette & Woods Inc. "In theory they make their money of the spread (between long- and short-term rates,) but most banks manage their rate risk pretty conservatively."
Still, banks have acute interest rate sensitivity, said Lawrence Vitale, a bank analyst with Bear Stearns & Co.
"The fact is, higher interest rates do affect some of the businesses banks are in," he said. "It affects the funding costs when banks rely on purchase funds, and it affects the ability to roll over CD rates."
As a result, Mr. Vitale said he sees a net interest margin squeeze at many banks. Before trading opened Monday, he downgraded J.P. Morgan & Co. and NationsBank Corp. to "neutral" from "attractive."
Will bank stocks recover this week?
Last month, after the Labor Department reported February employment figures had skyrocketed from the previous month, the S&P bank index fell more than 4%.
But the sector rebounded within the week, and has continued an astonishing 15-month climb of 72% through the close of trading Thursday.
Because higher employment numbers mean more stable earnings for banks, the stocks are likely to increase again, Mr. Berry of Keefe Bruyette said. But if the hit is sustained, then smaller bank stock valuations will be dragged down too, he added.
Ms. Pope Davis of Goldman Sachs believes by the end of the week the tide will have turned. Many large banks will have reported first-quarter earnings, which are expected to be up 10% to 12% from the year ago period, the analyst said.
There will be a differentiation between banks in the Southeast and Midwest, where the economies are strong, and the Northeast, where the economy is essentially flat, she added.
According to First Call Corp. consensus estimates by analysts, only two banks are expected to report first-quarter 1996 earnings lower than 1995's first quarter. (See table, page 22)
Despite rising delinquencies and static fee income, share repurchases and expense cuts will propel earnings higher, Ms. Pope Davis said.
Fleet Financial Group, in the midst of its balance sheet restructuring and digestion of two large acquisitions, is expected to report 91 cents earnings per share in the first quarter, down 3.19% from the year-earlier period.
Mercantile Bancorp. is expected to report earnings of 82 cents per share in the quarter, 11.83% below the year-earlier period.
One of Mercantile's largest customers, Edison Brothers, filed for bankruptcy, and the bank is having trouble with its cobranded credit card with Southwestern Bell, said Joseph Stieven, an analyst with Stifel, Nicolaus & Co. in St. Louis.
J.P. Morgan & Co. is expected to report $1.67 earning per share, up 32%, and PNC Bank Corp. is expected to report 66 cents earnings per share in the quarter, up 22.22%, according to First Call.