Stocks: Bank Stocks Regain Ground As Broader Market Struggles

Bank stocks outpaced broader markets Monday to recover ground from the pounding they took last week.

Broader markets, skittish about inflation because of strong home resale figures and indications of inflation in Germany, struggled for gains.

"The market is experiencing summer doldrums and fears about the economy and inflation, both here and abroad," said Richard Davis, chief of equity research at Tucker Anthony & Co. in Boston.

Many bank stocks, on the other hand, were up for the day.

"They got dragged down badly last week," said James Schutz, a banking analyst at Stephens Inc. in Little Rock. "Now we're seeing a bounce," he said. "I hope it's not a dead-cat bounce."

For the day, the Standard & Poor's bank index added 0.68% while the Nasdaq bank index dropped 0.42%. The Dow Jones industrial average lost 0.44% and the S&P 500 0.67%

Bank of America Corp. rose 1.73%, to $69.8125; Chase Manhattan Corp. 1.61%, to $82.875; and J.P. Morgan & Co. 0.80%, to $134.625.

Mr. Schutz said the bank group should see more gains.

"Absent a recession, the banks will continue to generate solid earnings increases," he said. "You'll see some modest loan growth, moderate operating cost increases, and a good increase in fee income."

Mellon Bank Corp., which derives 70% of its income from fees, scores highly with Mr. Schutz. "It's a classic example of operating leverage, where revenues grow faster than expenses."

"The bank is very well positioned" if rates increase, Mr. Schutz said.

Mr. Schutz also touts Community First Bankshares of Fargo, N.D. He says a push by the company into Arizona, Colorado, and Utah will provide loan growth and fee opportunities.

Despite Mr. Schutz's upbeat view, Community First's shares fell 2.36%, to $21.90625, on Monday.

Meanwhile, Washington Federal, a Seattle thrift, shows that though many mortgage banking companies are hurting, profits are still to be had in the industry.

In the second quarter its return on assets was 2.01% and return on equity was 15.35%-among the best results in the industry.

"Management is focused on earnings per share growth rather than on growth per se," said James J. Fowler, thrift analyst at the Montgomery division of Banc of America Securities.

"This is evidenced by Washington Federal's ability to maintain favorable profitability and expense ratios," Mr. Fowler said.

Single-family, 30-year fixed-rate mortgages make up 87% of Washington Federal's loan portfolio, with construction loans making up most of the rest.

The number of prepayments is dropping at Washington Federal in the wake of last year's refi boom. In the second quarter prepayments amounted to 32% of total loans, compared with 45% at their peak in last year's fourth quarter.

Washington Federal is successful at gathering the deposits that fuel its mortgage lending, Mr. Fowler said.

Most of the company's depositors are retirees, and not likely to be attracted to higher-paying Internet certificates of deposit, Mr. Fowler said.

The thrift also keeps its operating expenses low, operating branches that are staffed by four or five people in roughly 2,200-square feet of space.

For the day, Washington Federal shares declined 0.50%, to $24.75.

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