Banks stocks rebounded on Friday as investors looked past the debacle of hedge fund Long-Term Capital Management toward the prospect of an interest rate cut on Tuesday.
Analysts asserted that the market slide set off by the government- engineered bailout of Long-Term Capital had unfairly tarred bank stocks and created buying opportunities.
"The market took down innocent bystanders" on Thursday, said David S. Berry, research director at Keefe Bruyette & Woods Inc.
But by midday Friday, banks stocks were on the upswing as investors took comfort from $3.5 billion infusion of funds into Long-Term Capital by 14 commercial banks, a move orchestrated by the Federal Reserve Bank of New York.
Even more of a factor was the growing confidence of market players in the likelihood of a rate cut on Tuesday, when the Federal Reserve's policymaking Open Market Committee meets in Washington.
By the end of the day the Standard & Poor's bank index rose 0.06%, while the Dow Jones industrial average climbed 0.33%. The Nasdaq bank index rose 0.62% and the S&P 500 jumped 0.19%.
Some of the biggest gainers were BankAmerica Corp., up $2.6875, to $62.6875, and Wachovia Corp. up $1, to $87.87.
Shares of Unionbancal Corp., which is mostly owned by Bank of Tokyo- Mitsubishi, rose 8.81% on speculation that U.S. Bancorp would buy the company at $100 a share. Unionbancal's shares rose $6.875, to $84.
"I do not doubt that there will be other hedge fund failures," Mr. Berry said. "And the banks will have losses, but the aggregate amount of those losses will not be very large."
Banking industry analyst Sean J. Ryan of Bear, Stearns & Co. said volatility is likely to continue in the market, but he maintained that buying opportunities persist for names such as Suntrust Banks and Regions Financial.
These companies "were able to prosper through the last recession, thanks to favorable geography and conservative credit cultures that remain intact today," Mr. Ryan said. Though not predicting a recession, he said these banks "should have among the least problems if a recession, in fact, occurs."
As Mr. Ryan sees it, regional banks in general are likely to sport strong third-quarter earnings, because they are relatively insulated from global tumult. "There is also a likelihood of a interest rate cut, which will have a modest financial impact on banks, but will have a pronounced psychological impact," he said.
Mr. Berry said third-quarter earnings for regional banks are likely to come in on target. However, he pointed out that Keefe slashed earnings estimates for six major banks in the last three weeks, because of direct losses to Russia, loans to hedge funds, volatile trading markets, and slowing earnings in underwriting and other equity businesses.
The six banks were BankAmerica Corp., (before its merger with NationsBank Corp. was complete), Bankers Trust, Chase Manhattan Bank, Citicorp, J.P. Morgan & Co., and Republic New York Corp.
Meanwhile, North Carolina's Bank of Granite Corp. stock fell more than 6.58% Friday after the company announced that it suffered a credit loss which will impact its third-quarter earnings.
Bank of Granite stock declined $2, to $28.375.
"It is not a big deal. We continue to have great confidence in our loan portfolio," said chairman and CEO John A. Forlines Jr. "We just had one bad apple, and we had to get rid of it." The loss breaks the company's 62- quarter streak of earnings gains. Three years ago billionaire investor Warren Buffett called the company "the best little bank in America."