Individual retail investors are buying bank stocks at rates unseen since the 1970s, and their capital may drive the next merger boom, according to a report scheduled to be released today by UBS Securities bank analyst Thomas Hanley.
Attracted to the sector's low volatility and high dividends, the retail investor has been a major contributor to this year's persistent rise in bank stocks, Mr. Hanley argues.
Because small investors are drawn primarily to the large, well-known banks, these shares have risen faster than those of smaller, regional banks thought of as acquisition targets, the analyst said. This disparity will enable the large companies to buy the smaller ones, he said.
"The biggest trend driving (bank stocks) this year has been individual investors buying the stocks for their own accounts," said Mr. Hanley. "A year ago institutional buying was 17 times greater than individuals. This year the ratio is only five to one."
The effect has been dramatic. Despite a downturn in the bond market, which bank stocks traditionally have tracked, shares of money- center banks are up 14% this year, while superregionals are up 8%. UBS' list of smaller banks that are presumed to be takeover target is up only 5.3%. The S&P 500 is up 6%.
With the larger banks building superior price-to-earnings and price-to- book ratios, the next big wave of consolidation should commence by next summer, Mr. Hanley said.
Much of the Mr. Hanley's analysis is based on data provided by Birinyi Associates Inc., a Greenwich, Conn.-based firm that tracks money flows.
Chase Manhattan Corp., First Union Corp., Banc One Corp. and First Interstate Corp. enticed the heaviest retail investment, according to the Birinyi data.
By comparison, Birinyi shows First Tennessee National Corp., First Security Corp., and Barnett Banks Inc. have attracted a paltry amount of retail investment. A retail investor is defined as one purchasing less than 10,000 shares.
To be sure, many market pros believe in the "trickle down theory" that by the time good news about a stock or group of stocks reaches the average investor, it's too late to buy. Under that theory, the retail buying would precede selling by institutional investors.
Mr. Hanley disagrees. "Institutional investors have a lot of money on the sidelines. And it is our experience that whenever retail buying is strong, institutional buying usually follows suit."
Observers expressed surprise at the pickup in retail buying.
"This is not something I have heard of, I would have thought that most individuals would buy through mutual funds," said Scott Edgar, an analyst with SIFE Trust Fund, which invests primarily in banks.
"It makes sense, though, because there is an increasing number of individual investors, and the environment for banks is good with inflation low and interest rates stable," he added.
Another force that could drive bank stocks higher this year are European investors moving into the market, Mr. Hanley said.
Mr. Hanley and his research team left CS First Boston Corp. late last month to join UBS Securities, a unit of the Union Bank of Switzerland.