Bank stocks have been plagued with an old-fashioned case of interest-rate jitters - but will rebound without making major alterations to their business model, some analysts contended Tuesday as bank stocks neared 52-week lows.
The decline has given rise to a population growth among bearish analysts who argue that the banking model is fundamentally flawed. But many still maintain that banking companies are performing better than ever before. The biggest problem with bank stocks, these analysts say, is higher interest rates. Investors may be fawning over Internet stocks now, they said, but that does not mean banks have to change course to gain favor in the stock market.
Once the Federal Reserve stops raising interest rates and the valuations in technology stocks deflate, bank stocks will be running out of the gate, these observers said.
Some banking companies have had very public problems with their business models, noted Michael Granger, an analyst with J.P. Morgan Securities Ltd. "Some have cut too deeply in order to save costs, while others have taken their eye off the ball as far as banking and lost customers."
But most banks are keeping customers by developing products that they want and need, said Mr. Granger. They are also delivering these products via a broader delivery system, such as the Internet and the telephone.
Gerard Cassidy, an analyst at Tucker, Anthony in Portland, Maine, agreed, pointing out that banks' profitability is at historic highs.
In the third quarter - the most recent for which figures are available from the Federal Deposit Insurance Corp. - banks had unprecedented profits, Mr. Cassidy said. "With the industry hitting all-time record profits, there is no way that the banking model is flawed," he said.
The traditional 3-6-3 banking model - take in deposits at 3%, lend at 6%, and get on the tee by 3 p.m. - is long dead, Mr. Cassidy continued. "Today the successful banking model is one that has a multichannel delivery system including brick and mortar, ATM, and the Internet delivery," he said.
Mr. Cassidy acknowledged that competition from other financial institutions has eaten away at the consumer side of banking. But he said the banking industry has offset that by bolstering its fee-income business, and entering other lines of business.
He cited Mellon Financial Corp. of Pittsburgh with its Dreyfus Funds, Bank of New York with its processing business, and FleetBoston Financial Corp. with its private equity business. "A diversified revenue stream is the course of survival and thriving of a bank," Mr. Cassidy said. "The industry is not sitting idly by letting its business dwindle down to nothing. [Banks] are making changes to ensure their success in the future."
Higher interest rates are the biggest thorn in the side of the bank stocks, said many analysts. Higher short-term interest rates flatten the yield curve - the imaginary line between varying Treasury yields - and cause banks to struggle to make money on the spread between loans and deposits.
Funding clearly has been a problem in the industry. U.S. Bancorp and National City Corp. disappointed analysts last year because of margin compression brought on by the higher interest rates.
Still, most analysts say they believe bank stocks will take off once the Fed is done raising rates.
Bank shares also languished because many investors have left the sector.
"Investors felt that banking stocks pretty much ran their course, so they rotated into technology stocks," said Kenneth Puglisi, an analyst at Sandler O'Neill & Partners LP. "But more value investors are coming back, and the bank stocks are likely to come back after the Internet craze is over."
Gail Dudack, chief investment strategist at Warburg Dillon Read, said technology stocks may deflate sooner than most people think.
Last year 30% of domestic equity mutual funds went into the technology sector, compared with an average of 1% moving to other sectors, Ms. Dudack said.
"A disproportionate number of people were invested in the sector," she said. "Still, many of these Internet companies have no earnings and in many cases they are just concepts."
She contended that tech companies are the ones that must adjust their model.