Thrift stocks are quietly staging a rally.

Fueled by improving performance and takeover speculation, thrift shares have climbed by about 8% over the past month, according to the American Banker index of 25 large thrifts.

During the same period, bank stocks rose by 2.5%, while the broader market, as measured by the Dow Jones industrial average, climbed by 2.2%.

And despite earnings setbacks by a few big thrifts in recent days, analysts think the ride isn't over yet for the sector.

Hopeful Signs

Among the reasons for optimism: On the whole, loan quality is improving, provisions are declining, and profit margins are growing.

Another key, factor is the growing interest by banks in acquiring thrifts, both to increase market share and enter new regions.

"Banks, which long looked as if they'd never acquire a thrift, are looking at them as a more cost-effective way of acquiring a franchise in a given geographical area," says Jerome Baron, vice president and senior financial services analyst at Josephthal, Lyon & Ross in New York.

Recent Acquisitions

Within the last two months, First Fidelity Bancorp has acquired Peoples Westchester Savings Bank in Hawthorne, N.Y., and Citizens Financial Corp. of Providence, R.I., has acquired the Boston Five Bancorp as well as a Connecticut thrift, New England Savings Group.

Further west, three of the best-performing thrifts have also been purchased.

ABN Amro bought Cragin Financial Corp. in Chicago. Fourth Financial Corp., the largest banking company in Kansas, acquired Great Southern Bancorp in Springfield, Mo.

And Huntington Bancshares of Columbus, Ohio, bought Railroadmen's Federal Savings and Loan Association in Indianapolis.

Bargain Prices

While thrift stocks have outpaced bank shares recently, they still trade much more cheaply than banks.

As of the market's close on Monday, the American Banker Thrift Index stood at 116.2, way below American Banker Bank Index, which was at 188.6. (Both sectors were indexed at 100 on Jan. 1, 1989.)

Indeed, thrifts have historically traded at a discount to banks because of the limited nature of their business.

"Thrifts sell at cheaper price-to-earnings ratio than banks, so banks view thrifts as a bargain," says Wayne Bopp, a thrift analyst in St. Louis with Stifel Nicolaus.

Among the thrifts his firm favors are MAF Bancorp in Clarendon Hills, Ill.; First Federal Capital Corp. in Lacrosse, Wis.; and Advantage Bancorp in Kenosha, Wis.

Josephthal Lyon recommends the $3.5 billion-asset Collective Bancorp, Egg Harbor, N.J.; the $11 billion-asset Firstfed Michigan in Detroit; and, on a turnaround basis, Greater New York Savings Bank.

Soft Spots

Still, analysts sound a note of caution.

They point out that with the Northeast climbing out of the economic recession only slowly and California still in the doldrums, the situation of thrifts can vary widely from region to region.

They also note that some thrifts may already be pushing up against their price limits.

"A lot of the stocks have risen to a value where it's hard to make money on a takeover," says Gary Gordon, a thrift analyst with PaineWebber Inc. in New York.

Bank stocks were mixed at 4 p.m.

Among the losers was Chemical Banking Corp., which fell 50 cents, to $40.25. Comerica fell 75 cents, to $30, and First Bank System Inc. fell 50 cents, to $30.50.

Gainers included Fifth Third Bancorp, up 25 cents, to $53; and Crestar Financial, up 50 cents, to $41.625.

PNC gained 87.5 cents, to $29.50. Wachovia Corp. rose 75 cents, to $35.625.

Regional Differences

Raphael Soifer, an analyst with Brown Brothers, Harriman & Co. in New York, said investors were mainly favoring banks with prospects for bigger revenues.

"Banks in healthy regions are seeing loan growth, but you're not seeing much loan growth in New York, and what you're seeing in California is loan shrinkage," he said.

One of the negatives of Chemical, he added, is that the bank is heavily dependent on middle-market commercial and retail business in the New York metropolitan area, where the economy is still sluggish.

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