Banks, other financial stocks suffer as U.S. currency slides

March 08, 1995|By David Conn | David Conn,Sun Staff Writer

The stocks of most financial companies were hammered yesterday as investors reacted to the falling value of the dollar with fears of rising inflation and higher interest rates.

Higher rates tend to dampen bank profits. It didn't help that the financial sector has performed strongly this year, prompting some investors to take profits by selling their holdings.

Provident Bankshares Corp. was the hardest hit among local financial stocks, falling $1.25 to close at $22.25. Investment banking firm Alex. Brown Inc. fell 37.5 cents, closing at $38, while NationsBank Corp. of Charlotte, N.C., lost $1 to $48.75.

"Right now, unfortunately, they all seem to be getting hit pretty badly," said Robert A. Bonelli, chief financial officer of the Ernst Financial Group in Califon, N.J., and manager of the Ernst Bank Equity Fund.

"The fear, of course, from a fundamental point of view is that a weak currency is inherently inflationary," Mr. Bonelli said. That's because a weak dollar forces foreign manufacturers to raise the price of goods they export to the United States in order to retain the same level of profits.

Domestic manufacturers, meanwhile, can keep their prices relatively low to gain market share, or "they can raise their prices just a little bit," Mr. Bonelli said, which is something most manufacturers have been unable to do during several years of slow economic growth and low inflation.

Finally, investors are concerned that higher inflation would lead the Federal Reserve to raise short-term interest rates again. That's bad news for stocks, which must compete with fixed-income investments.

"Financial stocks had rallied on visions of a soft landing and lower interest rates dancing in people's heads," said John A. Heffern, a bank analyst in the Baltimore office of NatWest Securities. "We seem to have hit a bit of a dollar crisis. One of the possible consequences might be that [Federal Reserve Chairman Alan] Greenspan was a bit premature in calling for lower interest rates."

Given that bank stocks were up about 8 percent this year, profit-taking also was part of the reason for yesterday's declines, Mr. Heffern said. "It would come as little surprise that, particularly given the dollar crisis, people would want to take a few dollars off the table and turn a paper profit into a real one," he noted.

Among larger institutions, Citicorp fell $1.125 to $41; Wells Fargo & Co. in San Francisco lost $2.125, closing at $156.375; and Banc One Corp. dropped 75 cents, to close at $27.75.

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