Last week's mini-rally in bank stocks faded Friday amid fresh market fears that the industry's earnings outlook is weak.
This perception has left the banks without a positive investment story of their own - and hostage to the gyrations of the bond market, analysts said.
"There's no clear picture of what's ahead," said George M. Salem of Gerard Klauer Mattison & Co., New York. "And certainly nothing about the first-quarter earnings is going to knock anybody's socks off."
"There was probably too much optimism about interest rates for a few days" last week, Mr. Salem said. "But then the bonds reversed and the stocks sold off."
In afternoon trading Friday, nearly all major bank issues were off by a greater measure than other stocks. The banks also underperformed the market earlier in the week despite posting gains.
In the five trading days concluded Thursday, the American Banker index of the 225 largely publicly traded bank stocks was up 1.73%, while the Standard & Poor's 500 index was up by a more impressive 2.54%
The week's bank stock activity was dominated from beginning to end by the high-profile distress of Bankers Trust New York Corp., which said it may incur a $125 million first quarter loss from trading operations.
The news shocked Wall Street and the bank's stock plunged nearly 20% on Monday and Tuesday. After a brief rally, the shares were falling again on Friday, off 75 cents to $52.75.
Following suit, New York's Chase Manhattan Corp. said in its newly released annual report that its first quarter earnings might be damaged by the "challenging" environment for trading activities. Chase stock was off 50 cents to $34.375 Friday.
But the restrained outlook for the banks goes beyond the major money center and trading banks.
Analyst Raphael Soifer of Brown Brothers Harriman & Co., noted last week that profitability for his firm's 25-bank universe declined from the third to the fourth quarters despite loan growth and shows signs of a "cyclical peak."
Even after allowing for unusual fourth quarter factors, "the results didn't leave much to which sector-bulls could point," he said in a report on industry operating trends.
Viewed as a quarterly scorecard of winners and losers, the 25-bank group "finished barely above .500" at yearend, he said, with fourth quarter reported earnings per share of 13 banks comparing positively with the previous period, while 12 banks had negative comparisons.
Three months earlier, he said, the scorecard was a far more impressive 19-6, and for the second quarter of last year it was 16-7, with two ties.
Overall, the group, which includes money center, trading, and superregional institutions, earned 14.9% on common equity in the fourth quarter versus 17.3% in the previous period. Pretax operating income was down 19%, while net income declined 12%.
"Much of what happens in bank stocks right now is related to the bond market," agreed Frank J. Barkocy of Advest Inc. "The rally in January and February reflected the level of confidence about rates and economy."
Last month, it appeared that the economy was slowing and the Federal Reserve, having subdued inflation, would not raise rates again. But the slump of the dollar in international exchange has clouded that view.
Mr. Barkocy added that the banks were also probably due for some profit taking in the wake of the winter rally.
"Given the unfolding rate and economic scenario, it's possible the bank stocks will stage another rally in the next several months," Mr. Barkocy said, but earnings will probably be unimpressive until the second half of the year.
"The feeling in the market right now seems to be that the bank stocks aren't going to get away from you, and that there is going to be plenty of time to buy back in to take advantage of things later," he said.
Mr. Barkocy endorsed some profit taking himself on Friday in lowering the rating of Chittenden Corp., Burlington, Vt., to "accumulate" from "buy" on a price basis.
He noted that the shares had risen 14.5% since being added to Advest's Analyst Focus List on Jan. 4. In late trading, Chittenden, considered a potential takeover candidate, was down 12.5 cents to $23.50.