Bank stocks are strong performers, but concerns arise

Investing

March 09, 1998|By Bill Atkinson

HOW HOT are bank stocks?

Just ask Peter Martin, one of the top executives at Baltimore-based Provident Bankshares.

He recently took in at least $2.6 million by exercising options on Provident's stock. "The appreciation has been very substantial," said Martin, Provident's president and chief operating officer.

Investors who held their bank stocks, even while the industry was reeling in the early 1990s, have been richly rewarded.

Citicorp's stock, for example, was selling for about $11 in October 1990, and today it trades around $130. Provident was battered, too, trading in the $3.65 range eight years ago. Today, after a two-for-one stock split in February, it is trading in the $34 range.

"It is the hot spot to be," said Collyn Bement, a bank analyst at Ferris, Baker Watts Inc. in Baltimore. "So far, we don't see any reason for a downturn. Even the local bank stocks have been strong. For the most part, they are all pretty good performers; you don't have a lot of dogs."

Last year, shares of publicly traded banks were up 48.13 percent, compared with 31.01 percent for the Standard & Poor's 500 stock index, according to the SNL Bank Index, which is put out by Charlottesville, Va.-based SNL Securities.

But have bank stocks hit their peak?

"I think that might be a bit strong," said David C. Stumpf, a bank analyst at St. Louis-based A. G. Edwards & Sons Inc. "We think '98 could still be a pretty good year. It might not be as good as '97 was, but the performance in '97 was phenomenal."

Stumpf and the other banking analysts at A. G. Edwards analysts track 31 banks that include big institutions like NationsBank Corp., First Union Corp. and Bank of New York. Over the past 12 months that ended Feb. 28, shares of the A. G. Edwards banks jumped 49.6 percent, compared with 32.5 percent for the S&P 500.

Banks have been such a great investment because they are operating in a banking nirvana. The economy is strong, interest rates are stable, inflation is tame and borrowers are paying loans back.

"Fundamentally, things look good," said Tom Finucane, assistant portfolio manager at John Hancock Funds in Boston, which has $12 billion in assets under management in financial funds.

John Hancock runs a closed-end fund called the Bank and Thrift Opportunity Fund. The fund's price jumped 100 percent to $14 a share in 1997 from the prior year. It has pulled back some and currently trades around $12.50 a share.

But there are concerns about banks, and one of the biggest is whether business can get any better.

Stumpf wonders if investors should start taking some profits now to reduce their holdings in the sector.

"Although we are not predicting any major disasters, we do see some pressure," he said.

Asia, for instance, threatens earnings at some banks, namely large money-center banks that do business in that part of the world. Problems in Asia have already jolted the industry. A. G. Edwards' index returned a negative 4.4 percent in January largely because investors thought banks were going to lose money on their Asian loans.

Earnings could also be hurt by the year 2,000 issue.

Banks are spending billions to make sure their computer systems don't crash at the turn of the century, and the expenditures are eating into profits.

What could keep bank stocks rising is a strong economy and mergers. There was a flood of bank mergers and acquisitions last year, which helped pump up bank stocks.

"The whiff of takeovers, that is going to stay with the group," said David West, a bank analyst at Davenport & Co. in Richmond, Va..

Takeover rumors have pushed Provident's stock higher. Martin points out that management has helped boost the stock price, too.

Provident has been gaining market share, profits have been plentiful and the company now boasts a market capitalization (the stock price multiplied by the number of shares outstanding) of $750 million, nearly 30 times what it was eight years ago.

Martin exercised the options because a significant portion of his portfolio was tied up in Provident. He is spreading his investments around, some in real estate, some in stocks and some in bonds. But he is not about to unload the rest of his stake in the bank.

"I still own a lot of Provident stock," Martin said. "Our prospects are good. I think we will continue to do well."

Pub Date: 3/09/98

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