Banks' rebound fueled by low interest rates

Andrew Leckey

February 10, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

The great banking crisis appears to be over.

Aided by low interest rates that improve their cost of doing business and by a declining number of bad loans, the nation's banks and savings and loans have forged a dramatic comeback.

Bank stocks, thanks to the enhanced bottom lines and solid prospects, have gained 161 percent as a group over the past two years. Selected S & L stocks have similarly gone through the roof.

No one can be sure that all this good fortune will continue at the same frantic pace, but the outlook for 1993 is positive.

"We will have a third year of outperformance by the banking stocks, for the decline in credit costs is accelerating faster than originally thought," predicted Robert Albertson, banking analyst with Goldman Sachs. "Loan growth is there, and prices of the stocks still aren't high."

There's a new enlightened attitude toward productivity and a greater financial cushion for potential problems, analysts believe. Mergers also are playing a role in improving strength and profitability, as well as increasing speculative opportunities for investors.

"With the economy slowly improving and inflation still low, we don't think you need to own only the quality bank names anymore, so we're now moving into more cyclical names," said Diane Glossman, banking analyst with Salomon Brothers. "Due to their price increases, we've downgraded many of the highest-quality bank stocks to our 'strong hold' rating."

As far as the S & L industry is concerned, with so many of the troubled thrifts no longer in existence due to government action, there's an excellent business climate for healthy institutions.

In the Northeast, problem loans are decreasing. While California economic woes remain, the belief is growing that they've peaked and are slowly on their way down. Furthermore, adding speculative appeal for investors, the strength of the banking industry means more banks have the capital to buy up thrifts.

"For 1993, I think this is it as far as interest rate spreads are concerned, because they can't possibly improve," said Gary Gordon, S & L industry analyst with PaineWebber Inc.

"Still, I think problem loans will continue to decrease, and the acquisition wave will keep on going."

Forty percent of the thrift industry is now defunct, or "on Boot Hill," as Jonathan Grey, S & L industry analyst with Sanford C. Bernstein, put it. Another 25 percent are among the walking wounded, rendering their shares speculative. The rest are healthy, with seemingly unlimited potential, he believes.

"I've focused on a half-dozen large, healthy thrifts, though I monitor 50 of the largest and there are 2,000 in the industry as a whole," said Mr. Grey. "It's important to be selective, for not all thrifts are alike."

Among banking stocks, giant Citicorp is recommended by Mr. Albertson and Ms. Glossman due to its powerful earnings franchise and the fact it has improved its pre-credit operating margin by $2 billion in two years.

BankAmerica Corp. is also a favorite of Mr. Albertson and Ms. Glossman because of its tremendous earnings momentum from the integration of Security Pacific. Mr. Albertson expects a 30 percent price increase.

Other Glossman selections are Chase Manhattan, an undervalued bank that has restructured well to improve product lines, and Bankers Trust, which has moved away from traditional wholesale banking to merchant banking. Among regional banks, Ms. Glossman likes Bancorp Hawaii, Wilmington Trust Corp. and Marshall & Ilsley. Meanwhile, Banc One Corp. is a cyclical pick of Mr. Albertson.

In thrifts, a comeback by the California economy should make a vast difference. H. F. Ahmanson & Co. is recommended by Mr. Gordon and Mr. Grey because its problems in the California mortgage market may be coming to an end. Great Western Financial is a pick of both Mr. Gordon and Mr. Grey for similar reasons.

Another Grey selection is First Federal Financial, expected to rise significantly in price. As a speculative choice, Mr. Gordon admires CalFed Inc., which is still troubled but could turn itself around.

Throughout the banking and thrift industries are potential acquisition targets, with virtually any size institution seemingly fair game these days.

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