Institutions Stocking Up on Bank Stocks
Flush with a renewed confidence in the banking industry, the biggest money managers have been loading -- even overloading -- their clients' portfolios with bank stocks.
After dumping stocks steadily during most of 1990, when banks reported record losses, the institutions began reversing course in January.
The pace has accelerated steadily since then. By midyear, some portfolios contained more bank stocks than at any time since 1986.
Plenty of Optimism
"We are overweighted with bank stocks," said Bruce Herring, manager of a $50 million financial services portfolio at Fidelity Investments. "That speaks for itself about our optimistic outlook for the industry."
With $2.5 billion invested in bank stocks, Fidelity commands attention. The giant Boston-based mutual fund group leads the list of institutional investors with the biggest holdings of bank stocks. The institutions include a blue-chip collection of public and private pension funds, mutual funds, bank trust departments, assorted benefit funds, and other pools of cash. By reacting to the rally in bank stocks, these big institutions kept it rolling.
The group poured more than $8 billion into bank stocks during the first half of 1991, for a net addition to portfolios of $2.5 billion, according to CDA Investment Technologies, Rockville, Md.
A Breather for Management
The result: bank stock prices have zoomed. Many banks are now within hailing distance of 52-week market highs, giving CEOs a breather from a siege of anxious shareholders.
The 50 biggest institutions poured more than $8 billion into bank stocks through June, for a net $2.5 billion addition to their bank stock portfolios.
Several related factors are luring investors back to the bank sector.
Most money managers now are convinced that banks have stanched the worst bleeding from real estate deals and highly leveraged transactions.
"We are past the scary brink, the worry about credit," said Robert Bissell, senior vice president at Wells Fargo & Co., San Francisco, which is one of the biggest investors through a variety of funds it controls.
Hoping for Improvements
Consolidation also has captured investors' imagination with promises of stronger balance sheets, cost reduction, and economies of scale.
These investors aren't about to stop the flow of funds any time soon. Even with the rally, investors can point to dozens of bank stocks that are undervalued. More important, the biggest institutional investors agree: through consolidation and expense control, the industry has turned the corner, with more-profitable times ahead.
Bank executives no doubt appreciate the vote of confidence -- unhappy institutional investors bailed out of their stocks last year, sending prices into a free-fall.
Banks Among Big Holders
The five biggest institutional investors hold more than $10 billion in bank stocks. Two of those big spenders are banks: Wells Fargo, through a variety of funds, and Bankers Trust New York Corp., mostly for its own account.
But the investment postures of these money managers vary widely. Fidelity, Wells, and Bankers Trust spread their money around in more than 100 bank stocks each. Sanford C. Bernstein & Co., New York, and Capital Research and Management, Los Angeles, prefer to put their eggs into just a few baskets. Bernstein has investments in 29 stocks -- more than 20% of its overall portfolio -- and Capital held 19 stocks as of June 30.
For Bernstein, the concentration has been disastrous. In the first six months of the year, the investment company lost more than $80 million on its bank investment -- the only one of this top tier to lose money.
Some Good Buys Spotted
But taken alone, institutional portfolios under bank supervision trimmed their holdings of bank stocks by $124 million. Banks do not own other banks' stocks in any higher portion than other institutions. Nevertheless, bank portfolio managers interviewed said they see good buys among their peers.
The big winners of institutional investor dollars are strong regional banks whose stock is trading for less than 10 times projected earnings. The worst investment: most money-center banks, where loan loss problems are far from over, and the West Coast, where real estate problems are dragging down almost all the banks.
"The industry is great if you pick and choose," said Harry Rosenbluth, senior vice president with Boston Co., a big institutional holder of bank stocks.
Boston Co. significantly built its holdings of bank stocks in the first quarter of 1991 to its biggest stake in more than five years -- 6% of the overall portfolio, about double the percentage of bank stocks in the S&P 500.
Fidelity is also bullish. The investment company has poured an additional $43 million into bank stocks during the first six months of 1991.
Where is the money going? Mr. Herring, whose funds monitors about 130 bank stocks, has three favorites. Bank of New York, which has cleaned up its bad loans quickly, may be eyeing a sizable acquisition.
KeyCorp. has reported solid earnings from buying failed banks, and has kept its loan losses low because of its geographical diversity. Comerica is still undervalued, even after the run on the stock following the announced acquisition of Manufacturers National.
Some of the worst-performing banks suffered an exodus of investors. First City and Wells Fargo were among the biggest losers of institutional clients. Aggressive banks involved in acquisitions, such as NCNB and Fleet Norstar Financial Group have also drawn investors.