Bank stocks continued riding the roller coaster Friday as they soared on news making it less likely that the Federal Reserve will raise interest rates this month.
Producer prices rose less than expected in July, giving support to arguments that inflation remains subdued.
The figures were a pleasant surprise, said James Schutz, a banking analyst at Stephens Inc. of Little Rock, Ark. Net-net it was better than expected.
The government said prices paid to factories, farmers and other producers in July rose 0.2%, less than the 0.3% that had been estimated.
This indicates that inflation is under control at the producer level, Mr. Schutz said.
Bank stocks were among the main beneficiaries. The Standard & Poor's bank index added 4.08% and the Nasdaq bank index, 1.28%, outdoing the broader indexes. The Dow Jones industrial average rose 1.71% and the S&P 500, 2.27%.
We've been long overdue for a bounce,'' said Deborah E. Johnson, a senior economist at Deutsche Banc Alex. Brown.
Indeed, through Thursday bank stocks had dropped 3.9% during the week, and performed more poorly than any other major industry, according to data compiled by Deutsche Banc Alex Brown. Transportation stocks were the second-worst performers, down 2.1%.
Momentum was terrible, Ms. Johnson said.
Friday was different, with practically every bank among the top 50 showing hearty gains. Citigroup rose 3.97% to $45.8125, from $44; Chase Manhattan Corp, rose 4.45% to $79.125, from $75.75; and J.P. Morgan, 4.90% to $133.75 from $127.50.
Among regionals, Bank One Corp. rose 5.26% to $53.8125, from $51.125; KeyCorp, was up 5.29% to $31.125, from $29.5625, and PNC Bank Corp, 5.05% to $53.3125, from $50.125.
We are looking for more catch-up, if not now, than in the next few months, Mr. Schutz said.
Banking companies are generating decent profits, Mr. Schutz said. There's no reason they should be selling at 50% of the Standard & Poor's 500, in terms of 1999 earnings.
Among banks with a rosy future, according to Beth Messmore, an analyst at Merrill Lynch Capital Markets, is San Francisco's Unionbancal, which is 64%-owned by Bank of Tokyo-Mitsubishi Ltd. She expects it to revitalize earnings potential and more than double earnings-growth prospects.
An initiative at the banking company will spur the increases, Ms. Messmore said. The project, dubbed Mission Excel, is meant to improve operating efficiency over the next two to three years.
Unionbancal has long operated at subpar efficiency levels, averaging 65% over the past few years, well below management's long-term target of 54% to 56%, Ms. Messmore said.
Mission Excel addresses a bloated expense base to accelerate Unionbancal's productivity progress, she said.
Based on estimated results, Merrill Lynch said Unionbancal's operating efficiency is expected to improve to 57% in 2000, marking a whopping 500-plus basis-point improvement, compared with 1998.
Unionbancal is also looking to build shareholder value by having a greater shareholder focus, potentially more effective balance sheet management, as well as strategic positioning in faster-growth markets, Ms. Messmore said.