Money manager say they have renewed confidence in superregional bank stocks.
The turmoil in Europe has cast a pall over the big trading banks, with many analysts reluctant to predict third-quarter earnings at these institutions.
But superregionals appear a safer bet, particularly after several reported last week that they were continuing to benefit from low interest rates and improving credit quality.
"I think we have a period where there is a lot of uncertainty," said Richard L. Pike, vice president at Chancellor Capital Management and Trust, a New York money-management company.
Regionals May Gain
"You can take a position in a regional bank that is a safer bet, something that you can analyze and predict and that has a lot more visibility than the foreign markets."
The renewed confidence may pull shares of superregional banks out of their four-week slump, during which they underperformed the Dow Jones industrial average.
Shares of regional banks - as well as money-center banks -- have suffered in the past month as money managers have taken profits and moved their cash into other cyclical industries, where they believed potential gains in share prices were greater.
Economic Worries Linger
While the Dow lost 0.4% in the past month, superregionals dropped 2.5%, according to SNL Securities. Money-center banks fell 4.6% during that time, SNL said.
Investors soured on banks because of worries about the economic recovery. They are concerned that banks cannot sustain earnings or deal with problem loans unless the economy grows and loan demand picks up.
On top of that, investors worried that after two dozen interest rate cuts by the Federal Reserve since 1989, the cost of funds couldn't get any lower. In that case, net interest margins would more likely shrink than expand, cutting into profits.
Superregional Clouds Lifting
But recent disclosures by superregional banks point to a brighter future.
At a conference of money managers in New York last week, First Union Corp. and First Interstate Bancorp both predicted higher-than-expected earnings, and NationsBank Corp. said loan demand was on the rise.
Money managers at the conference, sponsored by Merrill Lynch & Co., said that wide net interest margins are safe for the next two or three quarters, which should generate record annual earnings for the industry.
|Many Are More Pricey'
"I think the superregionals will turn around soon," said Moshe Orenbuch, an analyst with Sanford C. Bernstein & Co.
Turn around, maybe, but not outperform. Some money managers think that the share valuations are not as attractive as they were last year.
"Some regionals are still pretty reasonable," said Donald Schmidt of Bartlett & Co., a Cincinnati money manager. "But many are more pricey than several years ago."
The European currency situation may help superregionals by creating more room for the Federal Reserve to further lower interest rates.
The Fed last eased on Sept. 4, cutting its target for the federal funds rate to 3% from 3.25%. Some economists say Germany's high interest rates limited the Fed's ability to cut domestic rates.
Further Easing Likely
When the German central bank eased its key rate recently by 25 basis points, the dollar gained ground.
If the Bundesbank cuts rates again to support European currencies -- which some economists see as likely -- the Fed may have additional room to ease. Some economists think cuts in both the funds rate target and the discount rate, now 3%, may be coming.
Bank stocks did well on Friday, as the Dow surged in late-day trading to rise 11.35 points, to 3,327.05.
Shares of PNC Financial Corp. led the gainers, climbing $1.125 to close at $49.75. J.P. Morgan & Co. gained $1 to $61.125. Sun Trust Banks Inc. gained $1, matching its Thursday rise, to close at $40.875.
First Union lost some of its earlier gains, falling 50 cents to $38. Nationsbank was unchanged at $44.50.