Battered bank stocks swooned again last week on news that the Federal Reserve had raised short-term interest rates, and analysts held out little hope for an immediate rebound.
The prospect of tighter net interest margins is keeping investors away from bank stocks, analysts said, and news of restructuring charges by a few banks has only worsened the market psychology.
"There just aren't any buyers. Bank stocks as a group have broken down," said Brown Brothers Harriman & Co. analyst Nancy Bush.
The American Banker index of 225 bank stocks fell 3.01% from Nov. 10 to Nov. 17, with much of the decline occurring after the Fed announcement on Tuesday that it had raised short-term rates by 75 basis points. Meanwhile the Dow Jones industrial average gained 0.16%.
On Friday, banks led a broad decline in the market, with J.P. Morgan & Co., Bankers Trust New York Corp. and PNC Bank Corp., among other bank issues, establishing new lows for the year.
Seth Glickenhaus, a senior partner in the New York money management firm Glickenhaus & Co., said that wealthy investors were moving away from stock and putting their money in municipal bonds. The less-affluent investors, he said, are attracted to the government bond market.
As for bank stocks, they "go down when interest rates go up," said Mr. Glickenhaus, who reduced his holdings of banks earlier in the year. "Wall Street has this bizarre notion that high interest rates are bad for banks.
Since money is banks' "main commodity, they should make more money when rates go up," Mr. Glickenhaus added. "It's crazy."
Merrill Lynch analyst Livia Asher said investors have been concerned about a compression in banks' net interest margins since the beginning of the year, but their concern didn't translate into a broad-based selloff until recently.
"The flattening of the yield curve changed all that," Ms. Asher said.
She also pointed out that early in the week PNC disclosed in its 10-Q filing with the Securities Exchange Commission that its net interest margin can be expected to decline significantly in the fourth quarter.
Ms. Asher said investors reacted on the theory that most other banks are in the same situation and they fled to other investments.
"It all comes down to margins," she said. "Banks tend to be liability sensitive."
On Friday, PNC's stock closed at $20.75.
Shares of Banc One Corp., Columbus, which is expected to take a large fourth-quarter restructuring charge, closed at $26, unchanged from Thursday and slightly above its year low of $25.25.
Rising rates also have been bad news for banks that emphasize trading activities.
J.P. Morgan, which traded as high as $72 early in the year, closed at its year low of $58.125 Friday. Bankers Trust, which has suffered weeks of bad publicity over the sales practices of its derivatives unit, was trading well below its low for the year of $58.125, at $56.75, which was well below its high of $84.625.
Mellon Bank Corp. closed Friday at $33.75.
With blood flowing freely in the streets, analysts did see a reason to hope investors will soon resume buying bank stocks.
"You get to a point where the stocks begin to look compelling," Ms. Asher said. "All the banks are down now. The value buyers will come back."
Sanford C. Bernstein & Co. analyst Moshe Orenbuch noted that many believe that banks will have to drastically raise their consumer deposit rates to deal with higher interest rates.
"I don't agree," he said. "People think rising rates will have an impact on the asset side of banks' balance sheets and that there is a possibility of a rapid rise in deposit rates. But if people are convinced the Fed has a handle on the economy, it will turn things around."
Mr. Orenbuch noted that if a number of banks show good fourth-quarter earnings, in spite of the rising interest rates, many, will give bank stocks another look.