Major bank stocks again posted gains last week, further evidence that their steep autumn price correction has run its course.
Most industry watchers anticipate more improvement through the end of the year. They pointed out that investors have wrung their profits out of these stocks this Year and are now looking ahead.
The American Banker index of 225 stocks was up 0.9% in the five trading days ended Thursday, besting a 0.75% improvement in the Dow Jones industrial average during the same period. The week before, the bank index outpaced the Dow for the first time since mid-October.
Bank stocks were mostly lower on Friday as money market interest rates rose slightly in the Treasury bond market. The blue-chip average rose 10.89 points to 3,740.67 on Friday.
In the banking group, the biggest losers Friday were First Chicago Corp., whose shares slipped by $1.25 to $41.75 and Chemical Banking Corp., which was off $1 $39.375. NationsBank Corp. was down 87.5 cents to $47.625.
Beyond the Fourth Quarter
"Over the next week, people will begin focusing on the trends in net interest margins and loan demand as well as the earnings," said Francis X. Suozzo of S.G. Warburg & Co., New York. "I expect good fourth-quarter earnings, but results this quarter are a little less important than other parts of the year, since the focus at this point is on 1994 and even 1995."
Mr. Suozzo thinks the outlook is good. Besides healthy earnings, he sees "continued significant dividend increases by banks, as well as upgraded credit ratings," contributing to good first-quarter stock performance.
The price gains ahead will not approach the explosive appreciation of last year's first quarter, "but we could see 5% gains for a couple of months," he said.
Dividend increases in particular may be a bright spot for banks as this year ends and 1994 opens. The stocks could be helped by anticipation of a restored common stock dividend by Citicorp.
"I think it's probably too optimistic to presume they will do it before yearend, but certainly before the next shareholders' meeting," said Frank R. DeSantis Jr. of Donaldson, Lufkin & Jenrette Securities Corp.
Once it carries a dividend, Citicorp's stock will be eligible for purchase by some institutional investors who have been barred from owning it while the payout is omitted.
That increased buying activity could also have a positive spill-over effect on other banking issues, analysts say.
Citicorp suspended its payout in the fourth quarter of 1991, at a time when the bank, like others, was being plagued by major loan quality problems.
The New York bank traditionally holds its shareholders' meeting in the spring, and a renewed payout around that time would dramatically signal the bank's recovery.
Even if Citicorp doesn't introduce a dividend, other banks may raise their payouts, which should spur interest in the stocks.
"The rise in bank dividends is an unmitigated positive for bank stock investors," said Kay C. Lister of Keefe, Bruyette & Woods Inc., New York.
The analyst rejected arguments that major dividend increases signify a slow-revenue-growth environment where the banks have few opportunities to put their capital to work.
"Our analysis indicates that dividend increases announced in 1993 reflect the improved profitability of the banking industry over the past two years and should properly be construed as a signal that prospects for continued earnings growth are good," the analyst said.
Many banks that boosted dividends this year, she said, "are still set to pay out only a moderate amount of their earnings, based on our 1994 estimates."
30% at First Interstate
She pointed out that First Interstate Bancorp, Los Angeles, despite raising its dividend twice this year, is paying only a projected 30% of earnings.
Wells Fargo & Co., San Francisco, which raised its dividend 50%, has reached a payout ratio of just 21% of earnings. First Chicago Corp. has increased its dividend by a third, but its projected payout ratio is 28%.
Indeed, she said, the median common stock dividend payout ratio by banks was only 30.4% in the third quarter.
The current payout ratio is "at the low end of the historical range of 30% to 40% of earnings," the Keefe analyst said.
"The theory that the rise in bank dividends means that banks don't need to retain as much capital because growth prospects are poor is not borne out" by current trends, she said. But if it is ultimately true, "then bank dividends will rise considerably higher."