Whither bank stocks?

The market may be meandering its way through the dog days of August, but some analysts think money-center banks are poised to break out afterward.

Meanwhile, smaller earnings gains at the superregional and regional banks may finally cause them to lose their standing as stock market leaders.

Banking industry analyst Francis X. Suozzo of S.G. Warburg & Co. said he thinks some of the nation's largest banks could appreciate 30% to 50% in the next year. He particularly likes New York's Chemical Banking Corp. and Chase Manhattan Corp. and Los Angeles' First Interstate Bancorp.

Regional bank stocks will probably just trade in place, Mr. Suozzo said, as net interest margins come under pressure. He also expects deposit competition to emerge again as banks strive to protect or expand their customer bases.

Judah S. Kraushaar, an analyst at Merrill Lynch Capital Markets, said he thinks stock performance among banks will depend less on traditional labels such as money-center or regional and "more on the best banks at controlling the expense-revenue relationship."

Merrill's six top picks among banks for the rest of this year are Bank of New York Co., Bankers Trust New York Corp., Bank-America Corp., and Mellon Bank Corp. - all classified as money-centers under some definition - plus two superregionals: First Union Corp. and Fleet Financial Group Inc.

Mr. Suozzo said he agrees that First Union and Fleet are among the regional banks with significant room to cut expenses and loan-loss provisions. "And they are still cheap relative to their potential" for boosting results this way, he said.

But he views banks in the traditional money-center group as the biggest likely earnings gainers in the short term and as likely to show the best stock price gains. He cited two reasons: These banks have the most room for improvement, and they are less likely to be hurt by margin shrinkage.

Banks in general and regional banks in particular have benefited hugely from the declining rate environment of the past year, Mr. Suozzo said.

The 40-basis-point expansion of margins in that period has augmented regionals' earnings power by 20% to 25%. This category of bank generally gets 70% of its revenues from the net interest income, in contrast to 50% at money-centers, he noted.

Money-centers, thus, have less to lose when margins shrink, as Mr. Suozzo said he expects they will, due to the maturing of investment securities as well as greater competition for deposits.

Right now, banks are generally reaping from 200 to 250 basis points of extra yield in their portfolios versus the current market U.S. Treasury securities. As these securities run off, the extra yield will decline.

"The key is how sustainable these very wide margins are," Mr. Kraushaar said. He thinks banks right now are positioned to benefit from stable interest rates. "A further decline in rates, or an increase, could drag revenues."

If the economic recovery does not gain altitude, some economists predicted, the Federal Reserve Board must slice rates yet again in its continuing effort to improve business conditions.

Summer doldrums overtook banking stocks along with the rest of the stock market. In late trading, the top three banking issues in terms of capitalization had declined on combined volume of less than a million shares.

BankAmerica Corp. was down 62.5 cents a share, to $44.875; NationsBank Corp., 25 cents, to $45.50; and J.P. Morgan & Co., the top money-center bank, 75 cents, to $60.

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