The market value of bank holdings by institutional investors fell more than 19% in the third quarter, the biggest decline since the Russian default that roiled financial markets around the world in the third quarter of 1998.

And some analysts are warning that more of the same is happening in the fourth quarter. "Somebody is selling bank stocks these days, let me tell you," said Scott Edgar, research director for the Sife Trust Fund in Walnut Creek, Calif., which has $1.1 billion invested in the stocks of banks and other financial companies. Not all institutions experienced a drop in the value of their aggregate bank stock holdings, according to data compiled by American Banker. (See tables on page 20.)

The value of bank stocks held by Sanford C. Bernstein & Co., a New York securities firm, rose a net $894 million, to $4.2 billion at the end of the third quarter, placing the firm as the nation's 22nd-largest institutional investor in bank stocks. In the second quarter it was not among the top 25.

Fund managers at several firms said they are buying bank stocks because they believe the sector is badly undervalued for the long term. One said that he expects banks to fare poorly in the next two years but to bounce back smartly after that.

Growth-oriented institutional investors have been dumping bank stocks, but value investors are beginning to reenter the market, some investors said.

At AXA Financial Inc., the U.S. arm of the French insurance and financial conglomerate that bought Equitable Cos., the value of holdings in bank stocks rose $614 million, to $14.7 billion, a 4.3% increase. AXA was the No. 4 investor in bank stocks in the third quarter, up two places from the end of the second quarter.

On the other side, TIAA-CREF Investment Management, the big retirement fund, dropped off the list. In the second quarter it was the 12th-largest institutional investor in banks, and the value of its holdings was $8.4 billion.

The data indicate that the drop in value of institutional holdings of bank stocks was the result of both plummeting stock prices and heavy sales. If investors had held on to the stocks, the decline in their value would have mirrored the overall decline. But the American Banker index of the 50 largest bank stocks was down only 14%, compared with the 19% drop in the value of institutional holdings.

Among the top 25 institutional investors in bank stocks, sales of bank shares outpaced purchases. Bank stocks sold by the top 25 were valued at $14.2 billion, and the amount bought totaled $11.2 billion. Adding in the fall of bank stock prices in the third quarter, the value of holdings by big investors in the top 50 banks fell 19%.

Overall, the value of institutional investor holdings of the top 50 banks dropped to $301 billion on Sept. 30, from $372 billion on June 30, according to data culled from recent filings with the Securities and Exchange Commission. (See table on page 21.)

The value of investments in bank stocks declined a net $3.4 billion among the top 25 institutional investors. And the proportion of bank stocks in the average institutional investor's portfolio fell to 6.63%, from 7.81%, a 15% decline.

Bank stocks tumbled during the quarter as a result of concerns about lower earnings and two interest rate hikes. Perhaps more important were fears that rates would rise higher, as they did in the fourth quarter when the Federal Reserve raised rates for the third time this year.

"The Fed sent a clear message before the [third] quarter began," said Mark Davis, director of research at Banc Stock Group in Columbus, Ohio.

Bank fund portfolio managers said that with technology stocks soaring into the stratosphere, much of the money that left bank stocks moved into that sector.

"If it is not an Internet or technology company, you are being thrown out with the bathwater," Mr. Edgar said.

The Banc Stock Group Fund hedged its portfolio by boosting the proportion of cash in its $13 million portfolio to 30%, from zero, Mr. Davis said.

"Most of the smart money recognized that we were going to have a third-quarter interest rate increase by the Fed," he said.

Similarly, Fidelity Management and Research Corp., the largest investor in bank stocks, sold $3.3 billion of bank equities, while buying only $1.3 billion. That reduced Fidelity's holdings in the top 50 banks, to 5.06% of its portfolio at the end of the third quarter from 6.04% at the end of the second quarter.

At Barclays Bank PLC, which ranks second in bank holdings, bank stocks fell to 6.78% of overall portfolio by Sept. 30, down from 7.68% on June 30.

Shares of Bank One Corp. were especially hard hit. Bank One shares held by institutional investors fell from $43 billion in value to $24 billion, a 44% drop.

Institutional holdings of the top 25 thrifts fared worse than those of banks. The value of holdings of the top 15 thrifts fell 20% in the third quarter, to $11 billion.

For more information related to this article, see the following tables in our Ranking the Banks section:Top Institutional Holders of the Top 50 Banks (Q3 1999)

Top Institutional Holders of the Top 25 Thrifts (Q3 1999) Note: These links open new browser windows

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