Bank stocks continued their meteoric rise Monday, leading a broad rally that lifted the Dow Jones industrial average past the 6,500 mark.
The S&P bank index gained 2.69% - its biggest one-day rise - while the Dow rose 76 points - or 1.17% - to 6,547.79.
The gain in the bank index was more than twice the 1.11% gain in the S&P 500, as the bank sector continued to benefit from record earnings, a strong economy, favorable regulatory actions, and share repurchasing programs.
"These are halcyon days," said Anthony Davis, bank analyst at Dean Witter Reynolds.
The top 50 banks are up 34% as a group for the year, compared to only 22% for the Standard & Poor's 500, Mr. Davis said. Money-center banks, such as Citicorp and Chase Manhattan Corp., have led the way; each is up 62% this year.
Giving bank stocks an added boost Monday were a favorable bond market and last week's ruling by the Office of the Comptroller of the Currency that will make it easier for national banks to expand insurance and investment banking activities, analysts said.
In addition, investors were bidding up the price of small and midsize takeover targets, apparently reasoning that last week's merger deal between ABN Amro and Standard Federal Bancorp of Troy, Mich., signaled further acquisitions by foreign banks in the U.S. market.
The big rally has forced several analysts to rethink their price targets for some banks.
Early in the day, Henry C. Dickson of Smith Barney, boosted his 12- to 18-month target price for Chase Manhattan stock to $115, from $100. He raised the bar for NationsBank Corp. to $125, from $105, and to $115, from $100, for BankAmerica Corp.
Earlier this month, George Salem, bank analyst at Gerard Klauer Mattison & Co. raised his 12-month target price for Norwest Corp. to $55, from $51, and for Wells Fargo & Co. to $320, from $300.
Chase shares rose $3.625, to $95.125; NationsBank, $2.125, to $104.25; BankAmerica, $5.75, to $103.50; Norwest, 75 cents, to $46.125; and Wells Fargo, $3.875, to $289.875.
To be sure, some analysts are not convinced the good times can roll much longer. Thomas McCandless, bank analyst at Natwest Securities, argues that bank earnings peaked in the first half, and he predicted it would become increasingly difficult for banks to add to revenues by cutting costs.
"No matter what analytical approach is taken, the underlying trend is one of a material slowdown in incremental normalized pretax earnings growth in the fourth quarter," he wrote in a recent report.
Some analysts argued that merger speculation may have lifted some potential targets' prices too high. Indeed, Standard Federal shares were unchanged at $56.375 - off from $58 Thursday, before the $59-per-share agreement with ABN Amro was announced.
Shares of Dime Bancorp, another presumed target, slipped 12.5 cents, to $15.875, after being downgraded by Thomas Theurkauf of Keefe, Bruyette & Woods Inc.
But the bullish analysts predicted interest rates would remain low, and might drop lower. Concerns about consumer credit quality are outweighed, they said, by a strong market for commercial loans.
"The fundamentals are so good they are overwhelming any negative," said Mr. Davis.
The bullish analysts agreed that the rally probably won't maintain its breathtaking pace but predicted that banks would continue to outperform the overall market in 1997.
"It's an ideal environment," Mr. Salem said. "I've been looking at this area for 28 years, and it's never been this good."
Mr. Salem said he expects bank earnings to grow next year at the 12% pace they've enjoyed in recent quarters. The S&P 500's earnings will average only 7% to 8% growth next year, he said.
Whatever happens to the economy at large, these analysts said, stock buyback programs offered by an ever-growing number of banks should benefit share prices. The programs support or even increase shares' value by reducing the number available to be traded.