Bank stocks rallied strongly Friday as news of a jump in unemployment fanned investors' hopes that the economy has slowed enough to discourage the Federal Reserve from further interest rate increases.
The Department of Labor reported 5.7% unemployment, a 0.3% increase in January, when analysts had expected no change.
Moving in tandem with the bond market, bank stocks continued a rally that had started on Thursday, one day after the Fed's latest credit tightening. Shares of Citicorp, First Interstate Bancorp, and NationsBank Corp. surged $2 or more.
"This is the third piece of good news with regard to interest rates," said Frank R. DeSantis Jr., a bank analyst at Donaldson, Lufkin & Jenrette. A lower GDP deflator, signifying slower growth in real dollar terms, and slowing retail sales were the others.
Citicorp, which was singled out by both equity and debt analysts, gained $2 to close at $43 on Friday.
Paul Mackey, an analyst at Dean Witter, raised his rating on Citicorp on Friday to "buy" from "hold." He raised his earnings estimates for 1995 to $6.15 from $5.85, which is still below the First Call consensus of $6.29.
Fitch Investors Service put Citicorp's debt on credit watch with positive implications. Fitch currently gives Citicorp's senior debt an A rating, and could elevate it to an A-plus within two months. The last time Fitch changed its rating for Citicorp was in February 1991, when it was downgraded to A from AA-minus.
Standard & Poor's also placed Citicorp's debt rating on a positive outlook. S&P's outlooks anticipate potential rating changes.
Fitch and Dean Witter both pointed to Citicorp's unique global network, a record $3.37 billion net income for 1994, a reduced operating expense ratio, expected core profit gains, and its risk-adjusted Tier 1 capital ratio of 7.8%.
Mr. Mackey at Dean Witter said Citicorp's global consumer franchise produces 56% of core earnings.
Analysts have shown concern over Citicorp's exposure to Mexico. But Mr. Mackey said that exposure "is more manageable than commonly perceived in the market." He said Citicorp's $5 billion exposure represents only 2% of assets.
However, he added that if the Mexican economy has a meltdown, Citicorp could experience higher credit costs because of forgone interest or increased losses.
Citicorp's risks mainly come from such macroeconomic forces as the Mexican economy, said Mr. Mackey. Higher interest rates could have an adverse psychological impact on the stock, while a recessionary business climate could adversely affect earnings from asset growth and lead to higher credit costs.