Stocks of commercial banks were lifted Thursday by one of the biggest bond rallies of the year and by news that the Federal Reserve is considering easing investment banking restrictions.
The National Association of Purchasing Managers touched off the bond rally by reporting that its composite index of economic indicators had slipped to 50.2%, from 54.3% in June. Economists had expected the July index level to be 55%.
This indication of a slower economy - which might convince the Federal Reserve to refrain from raising rates - pushed bond yields near their lows for the year. That helped interest-sensitive bank stocks to outpace the market.
The Standard & Poor's Bank Index rose 1.64%, while the Dow Jones industrial average increased by 1.19%, and the S&P 500 rose 1.57%. The Nasdaq Bank Index also rallied, rising 0.38%
A handful of big banks got an additional boost from news that the Fed may raise the cap on the revenue banks' securities subsidiaries may derive from underwriting and trading of corporate equity and bonds to 25% of the unit's total revenue.
These securities subsidiaries, set up under section 20 of the Glass- Steagall Act, are currently required to limit such revenue to 10% of the total.
Although 23 U.S. banks have such subsidiaries, only a few would benefit from the higher revenue cap, analysts said.
Among the biggest gainers Thursday were two banks that emphasize investment banking: Bankers Trust New York Corp., which rose $2.125, to close at $74, and J.P. Morgan & Co., up $1.50, to close at $86.50.
Among other banks with active section 20 subsidiaries, Citicorp closed at $83.25, up 37.5 cents. Chase Manhattan Corp. shares gained $1.625, to close at $71.125. NationsBank Corp.'s stock broke its 52-week high, closing at $86, up 12.5 cents.
"NationsBank will do very well because they have been very active over the last five years in building up their capital markets," said Thomas Hanley of UBS Securities.
Mr. Hanley also predicted that First Union Corp. would perform well in the investment banking arena. Its shares closed at $64.125, up 62.5 cents.
Analyst George Salem of Gerard Klauer Mattison said he doesn't believe any bank has been constrained by the 10% cap.
The cap, he explained, is a "stretch cap," meaning that subsidiaries can adapt by expanding their balance sheets with securities not restricted by the cap.
"I call them Hamburger Helper assets," he said.
Mr. Salem said Bankers Trust and Morgan "have the most involvement in the investment banking activities prohibited under Glass-Steagall. It is my impression that neither one has been turning away any business as a result of the 10% rule."
In other news, Trustmark Corp.'s stock closed at $22.125 after surging $1.375 on nearly three and one half times average daily volume. Analysts attributed the movement to "speculative" investors taking advantage of a recent dip in the stock price.
Separately, Old Kent Financial Corp. shares rose 43.7 cents, to $37.437, after Smith Barney upgraded them to "outperform" from "neutral."
Analyst Henry Dickson said he changed the rating because the Grand Rapids, Mich., banking company plans an aggressive share buyback and because he does not "see a heck a lot of downside in the stock."
He has raised his 12-month price target to $43.
