Bank stocks rallied on Wednesday, regaining more than they had lost the previous day. The Standard & Poor's bank stock index rose 2.6%, offsetting Tuesday's 1.9% decline.
Analysts said release of the central bank's Beige Book report, on which the Federal Reserve bases its monetary policy, indicated there should be little concern about inflation, reducing fears the Federal Reserve will raise rates.
The market has been whipsawed for the past couple of weeks, so it's good to see investors returning, said Ross Bruner, research director at Mabon Securities, New York. I believe when all is said and done, you won't see rates go that much higher.
The biggest banks performed particularly well, with many gaining more than 3%, and some up more than 4%.
Medium-size banks also showed strength. Regions Financial Corp., based in Birmingham, Ala., rose $1.5625 to $50, a 4.6% gain. Regions has the kind of asset quality that attracts investors on up days, an analyst said.
Meanwhile, Michael J. Ancell, an analyst at St. Louis, Mo.-based Edward D. Jones & Co., reported positively on Minneapolis-based Firstar Corp. He said Firstar's stock has declined too steeply since it announced its plan to acquire Mercantile Bancorp. of St. Louis almost five months ago. Planning for the integration appears to be moving along swiftly, it says.
Mr. Ancell says Firstar has built a solid franchise in the upper Middle West, and has the No. 1 banking market share in Missouri and Iowa, the No. 2 share in Kentucky and Wisconsin, and the No. 4 share in Minnesota and Arkansas.
Despite Wednesday's rise in bank stocks, some analysts remain pessimistic. Richard X. Bove, an analyst with Raymond James & Associates, St. Petersburg, Fla., says investors should focus on banks that are best positioned to ride out interest rate fears. For that reason, on Wednesday he downgraded First Tennessee National Corp. to accumulate from buy.
Mr. Bove believes the bank's earnings could be significantly hurt if interest rates move higher. If mortgage rates continue to rise, First Tennessee, the fourth-largest retail originator of single family mortgages, would suffer more than banks less prominent in the mortgage business, Mr. Bove said.
Similarly, First Tennessee's bond business tends to do poorly in rising-rate environments, he said. Shares of First Tennessee fell 6.25 cents to $33.875 on Wednesday. First Tennessee has an acquisition premium built in, which suggests that disappointments, should they occur, will have a more significant impact on the price performance, Mr. Bove said.
Overall, investors should retrench to financial stocks that are in sub-sectors where there is definable growth, where the earnings outlook is reasonably predictable and where valuation is supported by low multiples to revenues, earnings, and book value, Mr. Bove said.
Mr. Bove reevaluated the entire group of financial sector stocks that he covers, including mortgage companies and securities firms.
Prudence suggests that one should reduce commitments to financial stocks in this environment, Mr. Bove said.
The new strategy should be based on more conservative tenets, Mr. Bove said. An industry being invested in should be growing.
A company being selected must be experiencing a profit upswing, he said. The stock should be conservatively valued, based on traditional valuation methodologies.
My favorites are the midsize regionals because these banks tend to be asset-sensitive, with their earnings benefiting most from rising interest rates, Mr. Bove said.
Mr. Bove attributes the decline in financial stocks to fears that the financial environment is deteriorating.
Among the stocks Mr. Bove prefers are Amsouth Bancorp., SunTrust Inc. and community banks, including Fidelity National Bank Corp. and Seacoast Banking Co.