"Old economy" stocks are back in vogue, so some bank stocks are poised for substantial gains, said one veteran analyst in a report Monday.

Katrina Blecher of Brown Brothers Harriman became more bullish on the banking group and raised her short-term recommendations to "buy" from "neutral" on Wells Fargo & Co., Bank of New York Co., FleetBoston Financial Corp., Mellon Financial Corp., and SunTrust Banks Inc. "In the current environment, we believe high-quality institutions that are trading at attractive levels will be the stars," said Ms. Blecher. "This late in an economic expansion, we prefer companies whose earnings growth is based upon diversified revenue sources or non-credit-related lines of business."

Wells Fargo shares rose 6.25 cents, or 0.15%, to $41.125; Bank of New York $1.4375, or 3.50%, to $42.50; Mellon 75 cents, or 2.33%, to $32.875; and SunTrust 75 cents, or 1.48% to $51.50. FleetBoston Financial bucked the trend, falling 6.25 cents, or 0.18%, to $35.50.

The American Banker index of the 50 largest banks rose 1.88%, and the index of 225 banks rose 1.95%.

Wells Fargo shares have languished over the past week as market speculation about the company making another acquisition has worried some shareholders.

Wells Fargo's name surfaced in the market last week when news of the merger talks between ING Group NV, the largest Dutch financial company, and ReliaStar Financial, a U.S. insurer, leaked into the market. Some speculated that if the deal between ING and ReliaStar fell apart, Wells Fargo might be a white knight. ING agreed to buy ReliaStar for $6.1 billion on Monday. (See story on page 1.)

Speculation about Wells Fargo buying the privately held broker Acordia Inc. in Indianapolis also surfaced in the market last week.

Wells Fargo declined to comment. A spokesman for Acordia would only say that "because of the company's strong earnings this year, some companies have expressed interest in buying Acordia." He declined to identify the companies or say if they were banks.

Acordia says it is the largest privately held broker, with more than 80 offices in 25 states and approximately 3,400 employees. The company has significant market share in the Northwest, the mid-Atlantic region, the Midwest, and the South.

"Wells has made it clear that it is interested in insurance but I don't think that it would do a large transaction," particularly when it is in the process of buying First Security Corp., a Salt Lake City bank, said Ms. Blecher. She said Wells finds insurance attractive but said "that does not go hand in hand with buying a company."

Wells Fargo's shares have had a strong run and were probably down last week because investors were taking money off the table, the analyst said.

Despite the volatility in the group, some bank stocks are likely to make steady gains because "old economy" stocks are becoming more popular and concerns about interest rates are becoming less of a factor, Ms. Blecher said in her report.

"While we expect interest rates should continue to rise, we believe that investors' fear associated with rising rates is decreasing," she wrote. "Bank stocks have historically done better once investors accept higher interest rates, and can envision the light at the end of the tunnel."

The Federal Reserve has raised interest rates five times since last summer, but the net interest margin for the group declined only 12 basis points in the first quarter, to 4.01%, Ms. Blecher said.

Low stock prices and strong earnings in the first quarter also prompted Ms. Blecher to raise her recommendations.

Bank stocks are trading at a 51% discount to the Standard & Poor's 500, one of the highest discounts in the last 10 years, wrote Ms. Blecher. She says she now expects the group to outperform the broad market indexes.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.