Shares of companies that specialize in securities processing and other market-related businesses recovered Thursday in a more positive overall market.
Northern Trust Corp., Mellon Financial Corp., Bank of New York Co., and State Street Corp. all rebounded after falling 4% to 6% each on Wednesday. The four banking companies, which rely on fee income from processing, trust operations, mutual funds, and other capital markets operations, are in healthy positions because of more activity in the capital markets, industry observers said.
Shares of the four companies usually outperform those of other financial companies because their fee-based revenues are less vulnerable to rising interest rates, analysts said. Lately, though, some investors have become concerned about growth prospects. State Street and Bank of New York have pinned much of their growth potential on expansion in overseas markets, which are now showing signs of a slowdown.
Mellon rose 3.2%, to $42.01 Thursday. Northern Trust shares rose 2.8%, to $61.875, while shares of State Street rose 2.8%, to $92.86. At Bank of New York, shares rose 5.8%, to $47.20.
Meanwhile the American Banker index of 50 bank stocks rose 3% and the index of 225 bank stocks rose 2.7%. The Dow Jones industrial average recovered slightly, up 0.6%.
Analysts explained that the swing in sentiment among investors is linked to the high multiples of the stocks relative to more traditional banks. "These stocks have much higher multiples, which leads to greater volatility," said Stephen Biggar, an analyst at Standard & Poor's Corp. "It is an indication that they are less susceptible to interest rates and credit quality cycles."
At a stock picking panel during the annual conference of the Bank and Financial Analyst Association in New York Thursday, Jim Agah of SAC Capital said investors have been moving money into higher-risk stocks and away from the old standbys, including the processing banks.
"People have discovered that it is possible to make money by buying risk and selling safety; that is why the processing banks dropped," he said.
Mr. Agah said investors should stick with Bank of New York as well as to market-sensitive names such as Merrill Lynch & Co. because of the value of their global presence and diversification. He said these stocks offer a good buying opportunity because the market has already taken fears of slower capital market revenues into account in their share prices.
Dan Orlow of Lord, Abbett & Co. agreed that Bank of New York has good growth prospects.
S&P's Mr. Biggar rated Bank of New York a "buy," State Street and Northern Trust "hold," and Mellon "accumulate."
"I am not too concerned," he said. "From earnings growth, these banks will be in the upper third. You have less of a change in earnings growth assumptions."
Volatility in bank stocks is expected to continue through Tuesday, when many in the market believe the Federal Reserve Board will deliver the interest rate cut that investors have been awaiting.
Matthias Rieker contributed to this report.