Bank shares continued to outperform the overall stock market last week, and money managers saw no sign of the rally flagging.

Bank stocks, as measured by the American Banker index, rose 2% in the five trading days ended last Thursday, versus a flat Dow Jones industrial average.

In the 21 trading days ended Thursday, bank stocks gained about 12%, compared with only a fractional gain for the blue-chip index.

Some bank stocks gained more than 5% in the past five trading days.

Sees Confidence in Industry

"The recent rally reflects what people think the banks will earn as well as confidence in the industry." said James P. Goff, an analyst with Janus Capital Corp. in Denver.

He predicted record earnings for the industry in the second quarter.

The confidence is new, money managers said. It was lack of confidence in the industry's ability to improve earnings as interest rates rise that ignited a sell-off in mid-April. Bank shares fell about 15% before starting to climb again in early June.

Trading is one area where banks have proven they have power to generate earnings, and J.P. Morgan & Co. and Bankers Trust New York Corp., two banks with good track records in his area, gained last week.

Morgan's shares rose 6% in the past five trading days, to close Friday at $71.875. Bankers Trust gained 4.2%, to close at $77.

Turnaround stories, where declining nonperforming loans and foreclosed real estate can boost earnings, also did well.

Citicorp's shares continued their steady climb, rising 3.7%, to close at $31.25.

The New York bank's recent runup has caused one of its biggest Wall Street boosters to change his tune.

Francis X. Suozzo, an analyst with S. G. Warburg & Co., on Friday downgraded his long-time "buy" on the stock to "add." Mr. Suozzo noted that the stock had jumped 42% this year, versus a 13% rise for the other banks he follows.

Another big gainer in the past five trading days was Comerica Inc. Its shares rose 6.4% last week, to $31.

Index Up 10.2%

As of last Thursday's market close, the American Banker index is up 10.2% for the year. In the past four weeks, it has gained most of the ground lost during the selloff that began in mid-April. Bank shares for the most part remain below their 52-week highs.

Money managers and analysts attributed the recent jump in bank shares to several factors.

Investor fears of surging inflation, rising rates, and the erosion of bank profits have abated.

Equally important, while other industries, particularly those tied to consumer spending, are expecting disappointing earnings, banks are poised to report record earnings, said money managers.

Even if rates rise, many money managers said that growth in bank earnings will continue.

"I think the financials going forward look good in any scenario you want to paint," said Robert Bissell, a senior vice president and investment manager at Wells Fargo & Co.

Mr. Bissell said that for the banks he follows, a rise in short-term rates of 200 basis points would not have a material impact on earnings.

Analysts said that even though second-quarter earnings are expected to be outstanding, some banks may provide positive surprises.

Last Thursday, analysts at Merrill Lynch & Co. predicted stronger than expected second-quarter earnings at First Interstate Bancorp, Wells Fargo, Mellon Bank Corp., National City Corp., and First Union Corp.

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