Inflation fears dragged down financial stocks Thursday, with the American Banker index retreating to a 16-month low.
"It's getting ugly out there. Some of these banks haven't seen these levels in quite some time," said Jacqueline Reeves, an analyst at Putnam, Lovell, de Guardiola & Thornton Inc., as the American Banker index of the top 225 U.S. banks fell 2.3%, to 539.3, its lowest point since March 1997.
A report by the U.S. Commerce Department on durable goods orders, which showed continued strength in the economy, was blamed for the tailspin. The report did little to dispel any hope that the Federal Reserve would temper its anti-inflation rhetoric and consequent plans to raise interest rates. (See story below.)
The news was another blow to investors, who are increasingly worried that rising interest rates will shave corporate profits as the economy slows.
In testimony this week, Fed Chairman Alan Greenspan told the Senate Banking Committee that the four hikes in the federal funds rate - the overnight bank lending rate - since last June have not been sufficient to quash the threat of inflation.
With the persistent threat of higher rates, many investors are dumping bank stocks, and Wall Street analysts are not exactly touting the sector.
Raphael Soifer, an analyst at Brown Brothers Harriman & Co. in New York, has neutral ratings for all but a few of the money-center banks he covers. He has "long-term buy" ratings on Mellon Financial Corp., Wells Fargo & Co., Bank of New York Co., and SunTrust Banks Inc. All are companies he characterized as "conservative," with a higher percentage of fee-based revenues than the average banking company.
But these positive recommendations are for institutional investors "who cannot afford to have zero weightings in financial stocks," Mr. Soifer said.
For most investors, Mr. Soifer added, "an interest rate-driven bear market is not a favorable scenario for bank and financial stocks."
The plummeting valuations have left some analysts incredulous. Though the stocks' deterioration is reminiscent of the last phase of the interest rate hikes in 1994 and 1995, banks these days are much better positioned to take advantage of consumer information after spending so much on technology in recent years, Ms. Reeves said.
"Technology is playing a bigger role in terms of improving productivity and the knowledge of the customer base," she said.
Also, if seller expectations dropped a bit, a new wave of consolidation as a result of the repeal of Glass-Steagall restrictions could help stock values, Ms. Reeves said.
"We have a tremendous number of banks, and consolidation should continue," she said. "Financial modernization allows banks to move into more complementary lines of business they couldn't before."