The stocks of banks and other financial companies put on a dazzling display during the second quarter, capping a vigorous half-year performance in which they left other stocks in the rear-view mirror.
The American Banker index of the nation's 225 largest publicly traded banks advanced 12.4% in the just-completed quarter, compared with an 8.8% gain for the Standard & Poor's 500 stock index.
According to data provided by SNL Securities, Charlottesville, Va., and compiled by this newspaper, banks surged 24% in value during the first six months of the year. (See table on page 22.) In the same period, the S&P 500 scored an 18.6% gain.
Analysts link the stocks' exuberance to the huge rally in the bond market and consequent fall in interest rates; to takeovers and rumors of takeovers, and to a general absence of bad news about the industry.
Among banks, two traditional New York money-centers were stars. Citicorp was up 35.8% in the second quarter and 39.9% in the first half. Chase Manhattan Corp. gained 31.9% in the quarter and 36.7% in the half.
But as well as the bank stocks did, those of thrifts and specialized financial companies did better.
The American Banker index of the nation's top 25 thrifts was up 15.2% in the second quarter and 30.5% for the first half.
The top thrift performer was Westcorp, holding company for Western Financial Savings Bank, Irvine, Calif. Its shares shot up 42% in the second quarter and 79.8% during the first half.
Meanwhile, stocks of specialized financial companies rallied 12.2% in the second quarter and an impressive 32.5% in the first half.
Shares of Money Store Inc. were up 42.8% in the quarter and 93.9% in the half. Student Loan Marketing Corp. shares were up 33.9% in the quarter and 44.2% in the half.
Advanta Corp., the credit card issuer, was up 24.6% in the quarter and 59% in the half. Countrywide Credit Industries, the mortgage banker, was up 29.2% in the quarter and 47.4% in the half.
Can such market momentum continue?
"There will be a point at which valuations will be too high, but I don't think we're there yet," said analyst Katrina Blecher of Gruntal & Co., New York.
"I did a survey and found that credit quality is still improving at quite a few banks," she said. "Its premature to say fundamentals are deteriorating."
She recommends Bank of New York Co., Banc One Corp., CoreStates Financial Corp., Firstar Corp., Hibernia Corp., Mercantile Bancorp., and Norwest Corp.
Others on Wall Street see the yellow light blinking.
"We are growing more and more cautious on the bank stocks because of a couple of factors," said Michael Plodwick of C.J. Lawrence/Deutsche Bank Securities Corp.
"First, obviously, are prices," he said. "Many companies at midyear are approaching our yearend price targets. Second, we see a slowdown in some important fundamentals, in net interest margins and revenue generation in general.
"You wonder when the market is going to stop and take note of some of these things," Mr. Plodwick said.
Lately, he noted, slowing revenues have been an unlikely predictor of rising stock prices. "It seems that the more a bank's revenues slow down, the more it becomes a takeover candidate," he remarked.
"We're concentrating on banks we think can generate above average revenue growth and on consolidation candidates that are not overpriced, which," he noted, "are becoming harder and harder to find."
Mr. Plodwick currently recommends Keycorp, Bank of New York, First Interstate Bancorp, Crestar Financial Corp., Marshall & Ilsley Corp. and Signet Banking Corp.