Bank stocks soared Monday, propelled by both a growing likelihood of lower interest rates and enhanced prospects for industry consolidation.
Sentiment continues to grow that the Federal Reserve will begin cutting rates this summer to rejuvenate the sluggish economy. Banks' earnings would benefit from such a trend.
At the same time, the blockbuster $5.4 billion deal by First Union Corp., Charlotte, N.C., for First Fidelity Bancorp., Lawrenceville, N.J., was a powerful stimulant for the stocks.
"I think this may set the tone for the rest of the summer," said analyst Frank J. Barkocy of Advest Inc. "The twin considerations of lower rates and more mergers lift all boats as far as banks are concerned."
Lower rates, Mr. Barkocy noted, "take the pressure off banks to raise deposit expenses, which should eventually help their (net interest) margins and their earnings."
Banking issues in general sharply outperformed other stocks. The Standard & Poor's bank index was up 1.97% versus a 1% gain for the S&P 500 index.
Among the banks, money-center institutions, seen by investors as gaining the most from falling rates, and takeover targets, led the way upward.
In the money-center category, New York's Chemical Banking Corp. was up $1.625 to $47 in afternoon trading, while Citicorp was up $1.25 to $57.125. Chase Manhattan Corp. was up 75 cents to $47.50.
Meanwhile, among the takeover favorites in banking, Midlantic Corp., Edison, N.J., jumped $1.625 to $38.25, while Barnett Banks Inc., Jacksonville, Fla., rose $1.375 to $49.875.
UJB Financial Corp., Princeton, N.J., climbed $1.375 to $29.875. Meridian Bancorp, Reading, Pa., was up $1.25 to $33; and CoreStates Financial Corp., Philadelphia, was up $1.125 to $33.75.
The First Union-First Fidelity deal strongly underlines the bull case for bank mergers, according to Michael K. Diana, a bank analyst at Bear, Stearns & Co.
"This emphatically demonstrates that banks are still willing to buy banks," he said Monday. "You couldn't ask for any stronger statement of this than we've just gotten.
"It is a reaffirmation of takeover activity, and it will lead to more," he said. "It changes the competitive landscape. Others will have to respond.
"People are always talking about deals. Now, those who have talked in the last six months will probably start talking again," he said. "This doesn't necessarily lead to deals, but it's a necessary factor."
Earlier this year Mr. Diana picked New Jersey as the top state for future bank mergers, but put Midlantic rather than First Fidelity at the top of his list of probable candidates.
"I felt First Fidelity was a little too large for a deal, so I dropped down a notch in size." he said. The size of Monday's deal and the players involved serve impressive notice about the future, he said.
"I never saw the logic in the idea that banks no longer wanted banks because banks have branches and branches are out of fashion," Mr. Diana said.
"Buyers still want to buy and sellers want to sell," assuming the conditions for dealmaking are right, the Bear Stearns analyst said. "I think today's deal confirms that."