As the main beneficiaries of interest rate cuts, thrifts have ranked high among Wall Street’s favorite stocks and have risen steadily since early last year.

But if the Federal Reserve’s recent aggressive interest rate reduction policy has peaked, as many believe, some observers warn that the conveyor belt that moved thrift stocks along could go into reverse. Thrifts are not the place to be for cautious investors when interest rates are rising, said John Kline, an analyst at Sandler O’Neill & Partners. He was quick to add that the current environment is far from one in which the Fed might feel the urge to raise rates.

The expansion of net interest margins due to the Fed’s easing should slow but not come to a halt in the next quarter, and that should continue to give savings banks visible earnings, he said. (See Story - Preferred Issues: Interest Margin Benefits Go Beyond Beyond Usual Suspects )

Seattle-based Washington Mutual Inc. was among those benefiting most from the recent trend; its net interest margin rose to 3.21% in the second quarter, up 78 basis points from the same period last year. Mr. Kline pointed out that most of Washington Mutual’s loans are fixed-rate products, though, and most analysts agree that lower interest rates have worked their way through adjustable-rate mortgages and the adjustable-rate lenders will not benefit much longer from the lag effect between rate cut and rate adjustment.

The margin of Golden West Financial Corp. in Oakland, Calif., expanded by 57 basis points, to 2.92%, in the second quarter, but Jonathan E. Gray of Sanford C. Bernstein & Co. wrote in a research note Thursday that the stock had outperformed the market by 36% since he upgraded it on Jan. 24. Subsequently, he downgraded it to “market perform” from “outperform.”

However, most analysts are still somewhat bullish on the group. One factor in the thrifts’ favor is a relatively low credit risk, compared with their banking cousins, Mr. Kline said. Thrift share prices are also attractive in this comparison and in relation to the Standard & Poor’s 500 index, he said.

Howard Shapiro of Goldman, Sachs & Co. said he is also confident that the sector should hold up in a changing rate environment and said that strong loan growth might help the savings banks to offset slower margin expansion.

However, he said that even though the stocks are still rising, they might move more slowly to their peak.

Friday, however, was a bad day for thrifts. Washington Mutual was down 2.32%, though Golden West rose 0.06%. The American Banker thrift index fell 0.96%, and its index of 225 banks fell 0.25%.

Elsewhere in the market, Brock Vandervliet, an analyst at Lehman Brothers Holdings, downgraded M&T Bank Corp. to “market perform” from “buy” because he considers the stock’s valuation no longer compelling.

Mr. Vandervliet said that the high valuation of the stock is mainly the result of M&T’s strong performance but that the recent surge was in part due to speculation that the company might soon be included in the S&P 500 index.

M&T has risen 4.8% since July 1 and on Friday rose 0.41%.

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