With stock buyback programs not as alluring as formerly and few blockbuster mergers to provide excitement, investors have been flocking to banks that are boosting their revenues.
A review of bank stock performance for the year to date shows that companies with rapidly growing earnings are vastly outperforming their competitors, though those competitors are sometimes more profitable.
State Street Corp. has been the star of bank stocks so far this year, with a 38.7% rise in its price. Analysts attributed the advance in part to speculation that Bank of New York Co. may try to take over the Boston company. Its shares also got a boost when they were added to the Standard & Poor's 500 on May 7, which led to the purchase of shares by index funds.
But State Street's real strength, analysts said, is its top position in the securities processing business. That business is not terribly sensitive to changes in interest rates or other economic indicators that traditionally hurt bank stocks.
According to research by Salomon Brothers analyst Carole Berger, State Street has posted an annualized compound growth rate of 15.82% in operating revenues per share, the best of any bank she covers.
"Revenue growth has begun to be the differentiating factor" among bank stocks, she said. "Until we see more mergers, investors will feel more comfortable with revenue growth."
While investing in growing companies is hardly a revolutionary idea, revenue growth was not necessarily what attracted investors to bank stocks in 1995 and 1996, Ms. Berger said.
At that time regional banks were rapidly consolidating, which promised rapid and extensive cost savings.
Then when the consolidation surge began to wane, banking companies commenced large stock buyback programs. Of the 225 top banking companies, 125 are repurchasing shares.
But the performance of CoreStates Financial Corp. stock shows the change in investors' attitudes about cost-cutting and buybacks.
Last year shares of the Philadelphia banking company rose 37%, outperforming the S&P regional bank index by five percentage points. The gain was attributed to investors' optimism about CoreStates' merger with Meridian Bancorp. A big stock buyback program announced last fall also helped.
This year, however, CoreStates has gone flat. Its stock was up only 1.7% through May 16. The only major banking company stock that has done worse is Banc One Corp., down 2.7% for 1997, mainly due to its costly merger with First USA Inc., analysts said.
CoreStates' problem is lack of revenue growth, said Ryan, Beck & Co. analyst Elizabeth Summers. Its stock price has paid for Wall Street's disappointed expectations of earnings growth after the Meridian merger.
This fixation on earnings-per-share growth has caused investors to overlook the fact that CoreStates is one of the most profitable banks around, with a first-quarter return on equity of 21.9%.
In trading Monday, shares of Wells Fargo & Co. slipped $11.75, to $267.875 on news that Berkshire Hathaway, the investment vehicle of Warren Buffett, had cut its stake to 7.82%, from 8.15%.