Bank stocks fell last week, as lunging long-term interest rates enewed investors' concerns about bank profits.

In the five trading days ended last Thursday. the American Banker bank stock index dropped 1.62%. The Dow Jones industrial average, however, rose to record highs last week, gaining 1.21%. On Friday, the blue-chip average edged up, gaining 3.35 points to 3,615.48. Bank stocks were mixed.

With the yield on the 30-year Treasury bond falling below 6.25%, the lowest level in 16 years. investors worry that banks will get lower yields when they reinvest in the securities.

Since the cost of funds has remained steady, the lower yields would squeeze net interest margins and potentially reduce income, these investors argue.

Bank analysts disputed that argument. They said that banks do not typically invest in 30-year bonds. Banks are more likely to buy two-year Treasury notes, and the spread between the yield on that security and three-month certificates of deposits remains relatively strong. they said.

Nonetheless, money managers and analysts expect trading in bank shares to be flat until after Labor Day.

"I think bank stocks will move sideways until then," said Robert Bonelli, executive director of the Ernst Financial Group.

Earnings Boost

After Labor Day, trading volume will come back. and banks will begin hinting at their third-quarter earnings. Analysts expect another quarter of high profits.

In a recent report, Thomas Hanley,, an analyst with First Boston Corp., said he expects bank stocks to "firm and do well in anticipation of the strong earnings results" that the industry will report for the third quarter.

Some analysts and money managers said that last week's decline in bank share prices is not the beginning of a prolonged selloff, such as occurred in April.

"I don't think this is a major move for the stocks," said David Berry of Keefe, Bruyette & Woods Inc.

In April, bank stocks fell an average of 18% in about eight weeks. That selloff, too, was caused by fears about margins, though in that decline, a feared rise in short-term rates sparked the worries.

Last week's tumble was mild by comparison. Trading volume was light, not all bank shares fell, and some stocks that lost ground had posted big gains earlier this year, giving investors a chance to take profits.

First Interstate Bancorp's shares lost 5.7% to $59.875. And Keycorp's shares fell 5.6% to $37.875.

The money-center banks, though. were a mixed bag. Citicorp's shares, which have been among the strongest performers this year. were flat, closing at $32.75. But Chemical Banking Corp.'s shares were hard hit, falling 5. 1 % to $39.375.

Talk of Bid for UJB

In Chemical's case, though, money managers said the shares slid because they believe the bank will try to bolster its New Jersey presence by making a bid for Princeton-based UJB Financial Corp. The worry is that Chemical will overpay, as other banks have, for recent New Jersey acquisitions. A Chemical spokesman wouldn't comment on market speculation.

Whether UJB is up for sale, however, isn't clear. At a meeting last week, the board of directors was set to consider a restructuring plan aimed at boosting profitability - an action that can be interpreted in different ways.

One way is that the bank plans to remain independent, a stated goal of chairman T. Joseph Semrod. The other is that the bank is sprucing itself up to demand a high premium in a takeover.

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