The nation's top 100 banking companies stormed back in the fourth quarter with a 20.9% surge in market capitalization, regaining almost all the ground they had lost in the third.

Investors regained confidence as the Federal Reserve reduced short-term interest rates three times in rapid succession to soothe world financial markets.

Market capitalization-the aggregate value of common stock-is a crucial barometer of investors' feelings about the business strategies of banks and the operating environment for the banking industry generally.

The top 100 banks closed the year with $981.8 billion of market capitalization, having recaptured $169.7 billion in the fourth quarter. (See page 31 for full rankings.) Last June 30, before the stock market's big slide, the total was $1.03 trillion.

At yearend Citigroup, the combined Citicorp and Travelers Group, was in first place, at $133 billion. The figure had risen 32.3% in the fourth quarter.

The nation's top 25 banking companies, which endured particularly heavy capitalization drops in the third quarter, all registered gains in the fourth, most of them double-digit.

"I think it speaks to the resiliency of the financial stocks, particularly banks, which have done so much to prompt geographic and product diversification over the last few years," said James J. McDermott Jr., chairman and chief executive of Keefe, Bruyette & Woods Inc., New York.

"You could whine about Citigroup's billion-dollar writeoffs in the third quarter from emerging markets, but then you had to marvel at their ability to generate as much or more in profitability in the consumer sector," he said.

The banking industry leaders' aggregate market capitalization has now advanced in 14 of the last 15 quarters, and investors seem poised to push the figures up further.

"I'm wildly optimistic," said Miles P.H. Seifert, chief investment officer of Gary, Seifert & Co., a unit of Legg Mason Inc.

"With the fourth quarter out of the way, people will soon realize that earnings are going to be O.K.," he said. Banks' price-to-earnings multiples "remain attractive after the big third-quarter selloff, and the interest rate environment is good," Mr. Seifert said.

"Moderate (economic) growth and low inflation make for a perfect climate for bank stocks," Mr. Seifert said. "It looks to me like 1995 revisited."

Bank stocks and banks' market capitalization rebounded in 1995 after a steep selloff in the second half of 1994, when the Fed was raising rates.

The company that Citigroup bumped from first place at yearend is the new BankAmerica Corp. of Charlotte, N.C., formed Sept. 30 in the merger of NationsBank and the old BankAmerica. The new company had a Dec. 31 market value of $104 billion, up 11.7% in the quarter.

The new Wells Fargo & Co., San Francisco, formed in the merger of Wells Fargo and Norwest Corp., took the No. 3 spot, with a market value of $64 billion, up 10.9%. A year ago Wells Fargo alone occupied the seventh spot.

First Union, despite a 15.4% gain for the quarter, slipped to fourth, with a yearend market value of $60.2 billion. The new Bank One Corp.-the old Banc One plus First Chicago NBD Corp.-was fifth, with a market value of $60.04 billion, up 20.8%. Chase Manhattan Corp. was fractionally behind, with a valuation of $60.03 billion.

Despite the roller-coaster nature of bank capitalization trends in 1998, the industry leaders completed the year many leagues ahead of where the top banks were early in the decade.

At the end of 1990, amid the industry's worst credit crisis since the Great Depression, the top 100 banks had a meager combined market capitalization of $101.4 billion-less than the market value of either Citigroup or BankAmerica alone at yearend 1998.

Viewed another way, the top five banks at yearend were valued by the market at $401.5 billion. That almost equals the $406.2 billion aggregate value of the top 100 banks just three years ago, at yearend 1995.

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