Profit Taking Puts Brake On Rally in Bank Shares

The vast majority of big banks recorded stock price declines on Thursday, ending a weeklong rally.

Analysts blamed profit taking, a sign that many investors are not yet comfortable enough about banks' long-term prospects to stick with them after their stocks spurt upward.

Over the previous five days, all publicly traded bank stocks gained an average of 5.7%. Leaving aside the impact of Citicorp's free-fall, bank stocks rose 6% -- the strongest rally since early August, when they jumped 9% in 10 days.

In the past week, the American Banker index of 225 bank stocks outpaced the Dow Jones industrial average, which reached a historical high of 3061.72 on Wednesday.

Earnings Propelled Shares

"Stocks rallied in anticipation of earnings reports," said George Salem of Prudential Securities. "Then they rallied on earnings."

Certainly, banks' earnings were strong. "Earnings were better than expected for the good banks," said James Hanbury of Wertheim Schroder.

In addition to profit taking, other economic factors may have put the brakes on banks' gains. A rise in the consumer price index led to the sale of long-term Treasury bonds. The stock prices of financial companies like banks often fall when the Treasury market reverses, said analysts.

Some of the nation's better-performing banks lost ground in Thursday's downdraft. BankAmerica, which had gained in the rally, lost $1.625 a share, after rising $2. Security Pacific, which had poor earnings and sizable chargeoffs, was off $1. CoreStates Financial Corp., which reported slightly lower earnings than in the year-earlier quarter, was down $1.50.

Small Bounce for Citicorp

Only eight of the 50 largest banks registered gains, and they were meager. Citicorp, which had dropped $1 - nearly 10% - on news of its enormous loss in the third quarter, actually was up 12.5 cents.

One cause for optimism is asset quality, which has apparently ended a two-year slide.

In the 40 large banks that have reported third-quarter earnings so far, the level of nonperforming assets dropped slightly from the previous quarter, said Reid Nagle of SNL Securities. The fall - to 2.35% of assets from 2.37% - may be so small as to make little difference to earnings. Only California banks, mired in real estate quicksand, did not cut their levels of bad loans.

Fewer Sour Loans

The level of nonperformers is a strong indication that banks have turned the corner on bad loans. There were signs earlier this year that they had reached the bottom. In the second quarter, the rate of growth in nonperforming assets had slowed.

"That should give investors some reason to be optimistic," said Mr. Nagle.

But he and other analysts said the rally in bond prices reflected an overly optimistic view of banks' strength, even in light of the good earnings reported by many institutions.

"The rally resulted from an optimistic interpretation of bank earnings," Mr. Nagle said. "But the earnings reports didn't justify the rally that took place."

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