15% higher by yearend, a seasoned industry investor believes. "The fundamentals for banks are still too strong, and nobody has called off the consolidation of the industry," said Robert A. Bonelli, manager of the Ernst Bank Equity Fund. "The banking industry is going to earn $50 billion this year and we see strong sustainable earnings ahead," Mr. Bonelli said. So the Ernst & Co. fund was a buyer during the late October slide in bank stocks. Indeed, Mr. Bonelli thinks the correction opened some notable investment opportunities. Chemical Banking Corp. in the $57 area was a value play," he said. "Looking forward on earnings out six months at the normal price-earnings ratio, this is a $65 to $70 stock without a reach." Similarly, he expects Bank of New York, which slipped into the $42 vicinity two weeks ago, to approach $50 and Fleet Financial to rebound significantly from the $40 neighborhood it recently occupied. Mr. Bonelli offers three reasons for the sudden dive in bank stock values: mutual fund profit-taking, post-earnings malaise, and fears about consumer credit quality. "Mutual funds have to record their capital gains by the end of October and pay them out by the end of December in order to maintain their pass- through tax status," he noted. "My guess is that with so many of the bank stocks up in the range of 40% to 60%, the mutual fund managers were saying, 'Let's put away some of the gains and start the whole process over on Nov. 1.' "So we saw a lot of position-squaring by the funds. It was fairly obvious from the large-block activity in the last three weeks of October," he said. At the same time, the stocks were sold off in the aftermath of their quarterly earnings announcements, a recurring syndrome for the group. "It happens whenever the stocks are hot, and they had been very hot," Mr. Bonelli said. Finally, jittery investors scanning the horizon for a dark cloud suddenly decided they had found one: weakening consumer credit quality. "Some of these stocks were hammered on the basis of nothing beyond fears," said Mr. Bonelli, who said he does not believe consumer delinquencies will reach serious proportions for the industry. One of the stocks hit hardest was his fund's largest holding, MBNA Corp., the specialty credit card issuing bank. It was driven down to $36 from a high of $43, dropping $1.125 on one particularly bad day, Oct. 25. "That made it the best buy in financial stocks. Alfred Lerner, the chairman, bought a million shares when it got to $36," he noted. Mr. Bonelli's $10 million fund was up 43% for the year as of last week. During the past five years, the fund has provided an average net return of 28% annually to clients. "We stayed with the banks a year ago when it seemed everyone else was bailing out," he said, "and we made money in that awful market." He has, of course, taken profits several times this year as bank stocks have surged in value in a far better market. Still, he expects to have his fund 75% to 80% invested in banks through the end of this year. One place he owns no banks is the West Coast, owing to uncertainties about the regional economy. "Between military base closings and sales of real estate by the Japanese, it's a wait-and-see situation," he said. Among his best gainers this year have been the shares of four banks that are being acquired: Midlantic Corp., Shawmut National Corp., First Fidelity Bancorp., and Summit Bancorp. Three of those banks are in New Jersey, and Mr. Bonelli is betting on the takeover candidacy of a fourth, UJB Financial Corp. "Acquiring Summit simply makes (UJB) a more desirable franchise," he said. Another company he sees as top takeover bait is SouthTrust Corp. in Birmingham, Ala. The bank "would make a wonderful partner for somebody," he said. The manager also has stakes in several smaller banks he expects will be acquired fairly soon. He cited First Commonwealth Financial Corp., Indiana, Pa., and Amcore Financial Corp., Rockford, Ill. Mr. Bonelli's favorite investment, nearly to the point of sentimentality, is Provident Bancshares, Baltimore. "We started buying at $5, it's now at $31 and we're not going anywhere," he said last week. "We've made six times our money, and we're still holding the stock. Provident has given us 20% a year." Unlike some investors in bank stocks, he also owns companies that frequently buy other banks. His second-largest holding is Chemical, which is merging with Chase Manhattan Corp. Next are holdings in PNC Bank Corp., the acquirer of Midlantic, and Mellon Bank Corp. He also owns First Union Corp., which is buying First Fidelity, as well as Keycorp and Bank of New York, both well known as acquisition-minded companies. Mr. Bonelli, a former banker himself, believes the best banks are far better managed these days. "No longer are they contend just to ride the cycle" as lenders, he said. "They are asset management companies as much as they are banks. They have changed their cultures and they truly are more diversified."
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