Rising interest rates and soured merger expectations get most of the blame, but some analysts think there are other important reasons why bank stocks have fallen so sharply from favor.

By far the biggest other reason is that earnings, while still good, are not getting better. Industry analysts trace that phenomenon back more than a year, to the summer of 1998, and offer various reasons why it has happened.

"Bank stocks began underperforming the market 15 months ago when questions first arose about the sustainability of the growth rate of bank earnings," said Michael L. Mayo of Credit Suisse First Boston in New York. He turned bearish on the stocks last year. "Higher interest rates came later and have had little to do with it," he said.

As he sees it, earnings growth has topped out because banks are being forced to both reinvest and restructure themselves to maintain market share, "whether in credit cards like Bank One, in processing like State Street, in capital markets, or in traditional banking."

"All the low-hanging fruit has been grabbed, and the effort now is to get to the next level of efficiency and competitiveness," he said. "That means spending money and spending it wisely, but spending to enhance revenues is front-loaded, which is a damper on earnings."

What about banks not engaged in such efforts? "You would have to ask whether they are somehow uniquely positioned or putting off the day of reckoning," he said.

Mr. Mayo is neutral on banks generally, with a "sell" rating on multinational banks such as Citigroup Inc., Chase Manhattan Corp., and J.P. Morgan & Co. He has also had a sell rating since May on Bank One, which was the worst-performing major bank stock in the third quarter.

Others see pressure on earnings from the dearth of mergers.

"Lack of revenue growth pushed the mergers to begin with," said Frank W. Anderson, an independent bank analyst in Dallas. Banks usually take big writeoffs immediately after mergers, and this artificially inflates earnings for a while. "Investors are aware that mergers take costs out, then drive earnings for a couple years," Mr. Anderson said. Earnings growth of 10%, 12%, or 14% a year is often acquisition-driven, he said. "If that is taken out, the underlying growth rate may be more in the 6% to 8% range."

Revenue growth is doubly important in the current stock market environment, he said. With most of the overall market being driven by a handful of stocks, mostly technology-related, "the most important factor is not the price-to-earnings ratio but the confidence of investors that a company will make its earnings number."

Mr. Anderson said this kind of investor confidence in banks has eroded, thanks to earnings warnings or disappointments at several high-profile banking companies, notably First Union Corp. and Bank One. On the other hand, "investors will pay 80 or 100 times earnings for Microsoft shares because they know the number is going to be made."

Still another factor is the rising cost of funds for banks. "The industry has largely run through the excess liquidity that has helped it book a lot of loan growth without having to go out and bid for deposits," said Lawrence W. Cohn, research director at Ryan, Beck & Co. in Livingston, N.J. He said the excess liquidity resulted from securitization of loans by banks, making them less dependent on deposits. Recently, however, margins have shrunk in the securitization business, encouraging banks to hold more loans on their books. And they need deposits to fund them. "Now more banks are faced with having to raise money to expand their balance sheets," he said.

"We are hearing stories from across the country about banks concerned about their true marginal cost of funds these days," Mr. Cohn said. "It is something that has been 10 years coming and now has arrived."

Rising interest rates also play a key role. "There are many banks with very large investment portfolios that they should be able to tap as a secondary source of liquidity," Mr. Cohn said. "But the problem right now is that they have to take a loss to get at it."

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