Stocks: Reassurances on Credit Quality Keep Bank Recovery Going

slide sparked by fears about declining credit quality. The stabilization coincided with several analyst reports that that those fears may have been overblown. Thomas Hanley of CS First Boston reassured investors in New York on Wednesday that worries about credit card losses this year would prove similar to the concerns over margin compression that caused an autumn selloff in bank shares last year. "Credit cards will be a problem, but a manageable one," he said. The Standard & Poor's index of major banks rose 1.69%, on Wednesday and another tktk% on Thursday. Among the big gainers in share price Thursday were Banc One Corp., up tkt to tktk, Republic New York Corp., up tkt to tktk and First Union Corp., up tktk to tktkt. "Everybody realizes that the 15% selloff that began two weeks ago was a bit of an overreaction to credit quality concerns that surfaced at that time," said Michael Ancell, an analyst with Edward D. Jones & Co. "The bottom line is that companies with decent underwriting standards should not be as hard hit as finance companies that have looser underwriting standards." Also driving the two-day rally was a surge in bond prices, he added. Economic data showed higher-than-expected jobless claims and other signs that the economy may be weakening, he said. Mr. Ancell upgraded Banc One to "strong buy" from "buy," noting its 11% pullback recently. Similarly, Michael Mayo of Lehman Brothers reiterated his bullishness on the industry in a report on Thursday. "Negative psychology regarding bank stocks is not new," he wrote. "Last year, concern was that margins would decline - they did - but earnings nonetheless increased. "Now the concern is that loan losses will increase - they will - but earnings will again continue to increase, probably by 10% from 1995 to 1996. The market is assuming the worst of all worlds, assuming that rates will not decline and that consumer credit quality will fall off the edge." Mr. Mayo predicted that banks would benefit from credit quality that is better than expected, or that rates will decline enough to soften the blow. Banks have $100 billion in excess capital, he continued, so the companies can absorb any losses.

*** In trading on Thursday, shares of Wells Fargo & Co. and First Interstate Bancorp moved up with the rest of the market, tktk to tktk and tktk to tktk respectively, in the absence of news on Wells' hostile bid for Interstate. Rumors on Wednesday that Citicorp was considering a bid for First Interstate sent shares of Citicorp up 4%, said Scott Edgar of Sife Trust Fund in Walnut Creek, Calif. Shares of the New York money-center climbed another tk to tktk on Thursday.