Stock prices of superregional banks have plunged in the past month, as investors showed their concerns about California real estate and the pace of the economic recovery.
In the past four weeks, SNL Securities' index of super-regionals has fallen 3.0%, a deeper drop than the 2.4% slide of the Dow Jones industrial average in the period.
Shares of money-center banks have lost just 0.2%. At the same time, the American Banker Index of 225 bank stocks has lost 1.97%.
Bank stocks rallied on Friday as investors anticipated a cut in interest rates from the Federal Reserve. Some of the banks that were big losers in the past month gained back some of their ground in the market.
However, fears that the economic recovery will falter continue to raise uncertainties about the strength of bank stocks.
"There are players out there that are starting to doubt the strong cyclical recovery thesis," said Scott Pape, and portfolio manager with Loomis & Sayles in Chicago.
The big California banks have led the superregionals downward, with investor concerns about real estate being the principal factor. Wells Fargo & Co.'s shares fell to $71.25 at Thursday's close from $79.875 a month ago. BankAmerica Corp.'s shares tumbled as well, down to $43.75 from $46.375.
But the June losses weren't limited to California banks. Prior to Friday's rally, CoreStates Financial Corp., Philadelphia, lost $2.375 to $48. KeyCorp's shares drifted down to $33.125 from $30.75. NationsBank Corp.'s shares slipped to $44.375 $46.75.
For June as a whole, some losses came as investors took profits. Any investor who was held on to bank stocks for a while can almost inevitably sell at a profit. With the uncertainty about the coming presidential election, many investors are switching out of the equity markets and boosting their cash holdings, say analysts.
A Strong Cyclical Play
Money-center banks, however, may still be seen as good buys. The shares trade at lower price-to-earnings multiples than superregionals.
For investors who continue to bet on the industry as one that will prosper during a recovery, money-center banks present the best cyclical play, analysts said.
According to Salomon Brothers investors may get the best value in banks whose earnings growth is less dependent on an economic recovery.
The firm likes NBD Bancorp, Society Corp., and Comerica Inc. Not coincidentally, these three banks are all involved in big mergers, where cost cutting is expected to lead to high earnings.
Investors and analysts said they are not concerned about the month-long pullback.
"I wouldn't be surprised if the stocks drift or move sideways, said John Leonard, an analyst at Salomon Brothers. "I don't think we are on the verge of a major tanking."
Many believe the industry credit problems are improving and that loan demand will return, boosting earnings. They expect the bank stock rally to resume in early July, as banks begin to report their second quarter earnings.
If the Federal Reserve follows President Bush's prods to cut interest rates, banks stocks may rally.
"We think second quarter earnings will be good," said Coreen Kraysler, a portfolio manager with Independence Investment Associates in Boston, a big investor in bank stocks. "Net interest margins will be wider at some banks than in the first quarter. "We are still very positive on the industry."