Money managers remain gung ho on bank stocks despite the beating the sector took last week.

Among their hot picks for the second half of the year are the weaker banks that are still digging out from bad loans and those that can boost per-share profits from recent acquisitions. Shares of those two types have plenty of room to rise, these managers said.

Seven Picks

Some of the most frequently mentioned names are: Bank of Boston Corp., Bank of New York Co., Citicorp, MNC Financial Inc., NationsBank Corp., First Union Corp., and Chemical Banking Corp.

"Over the second half of the year, I think bank stocks are in one of the best positions to outperform the market," said Tucker Andersen, a managing partner of Cumberland Associates, a New York investment management firm.

No investor interviewed for this article had changed his mind about the industry or his stock picks, despite the battering bank shares took last Wednesday and Thursday. The American Banker index of bank stocks lost 3.05% of its value in what some analysts described as a "bloodletting." The decline came in the face of slew of strong earnings reports.

Several Wall Street companies - including Smith Barney, Harris Upham & Co. and Merrill Lynch & Co. - spurred the selloff by knocking some money-center and superregional banks off their "buy" lists.

But on Monday, analysts said the carnage was over and some stocks regained a bit of the ground they had lost.

The |Momentum Players'

Behind the selloff were investors who felt a 20-month rally that had sent share prices rising more than 30% was nearing an end.

Those who cashed out include a class of investor Wall Street calls "momentum players." These investors aren't usually attracted to the banking industry, which is normally the province of value investors who seek cheap stocks.

Momentum players snap up shares of companies they think have potential for big gains in earnings. They represent faster money, cash that floods into and then gushes out of an industry or a stock.

Their money pumped fuel into a bank rally already ignited by value investors. Just as banks began to report strong second-quarter earnings and their stocks were rising, these momentum players took their profits.

Primed for a Return?

One reason they sold is that they could make a profit in the banking industry. Shares of companies in other industries were not rallying. Overall, the Standard & Poor's 500-stock index has been flat this year. Accordingly, the momentum players may be back.

Money managers said bank earnings will continue to improve, despite a sputtering economic recovery. Those earnings will fuel a new rally in the third and fourth quarters, they said.

"A weak economic recovery is very good for bank stocks and is mildly positive for the banks themselves," said Bruce Herring, a portfolio manager at Fidelity Investments.

Even in a ho-hum economy banks will outperform the Dow Jones industrial average, predicted Mr. Andersen of Cumberland Associates. But that could mean bank stocks no longer rise but stabilize as the wider market falls.

Several factors will help paint a better picture for bank earnings prospects.

Net interest margins - a measure of the difference between the cost of funds and the interest charged for loans - will stay wide, which should boost profits. And with the huge gap between yields on three-month and 30-year Treasury securities, banks will continue to make money on their bond portfolios. Some banks, moreover, are cutting their loan-loss provisions.

Other investors find encouragement in the reduction of bad loans at some banks. "In general, stocks we like have declining nonperforming assets, said James P. Goff, senior analyst at Janus Capital Corp., Denver.

His favorite stocks include First Union, NationsBank, Bank of New York, and -an exception to his investment rule -- BankAmerica Corp. Although BankAmerica's bad loans are growing, Mr. Goff said the franchise has enough value that he will continue to buy its shares.

Bank of Boston is a favorite pick of both Fidelity's Mr. Herring and Cumberland's Mr. Andersen, partly because of its improved credit quality. "Bank of Boston is one of the most powerful stories around," said Mr. Andersen. While the stock has rebounded this year, both money managers believe it has room to grow.

Investors said,however, that the industry as a whole doesn't present the compelling investment story it did early this year.

"The valuations aren't what they used to be," said Loren Schifman, an analyst at the Dreyfus Corp. group of mutual funds in New York.

Mr. Schifman said he remains bullish on Chemical, Bankers Trust New York Corp., and First Interstate Bancorp. The last two stocks are unusual picks, he acknowledged, but he believes Bankers Trust can continue to show strong earnings, despite its reliance on trading income.

Taking More Risks

And First Interstate gets his nod because it has the best loan-loss coverage among major California banks and is an important franchise west of the Mississippi.

Investors seeking high returns are turning to riskier turnaround banks. "As investors get more confident, they start trading the lower-quality names," said Mr. Herring. "There is still a lot of room for growth left in those stocks."Hot StocksMoney managers' choicesfor the second half of 1992Institution PicksFidelity MNCInvestments CiticorpBoston Bank of BostonDreyfus ChemicalCorp. Bankers TrustNew York First InterstateJanus Capital First UnionCorp. NationsBankDenver Bank of New YorkCumberland Bank of BostonAssociates ChemicalNew York Continental

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