Banks, S&Ls; doing well despite economic fears

Amid dark fears about the U.S. economy and the likelihood of a stock market correction, the nation's banks and savings and loans have provided a rosy scenario.

Investors in these stocks profited greatly from the decline of short-term interest rates over the last three years, as the Federal Reserve worked to bolster the banking system.


Profit margins widened, while the number of bad loans and provisions for loan losses declined. Merger and takeover activity resulted in stronger institutions, these transactions providing a positive kick for shareholders as well.

The question is whether the bloom is off the rose, and all this good fortune is coming to an end.


There are concerns, such as whether the economy will turn around in a timely fashion and whether financial institutions will keep growing only by gobbling each other up. Profit-taking by holders of these stocks is on the rise.

"Profit margins are now peaking, and, while the industry is in great condition, there's still insufficient loan growth," said Stephen Binder, portfolio manager of the $200 million Fidelity Select Regional Banking Fund, up 13 percent this year following a 48 percent gain last year and a 66 percent jump in 1991.

Stock prices seem to reflect the good news of low interest rates and solid double-digit dividend growth, and there are fewer easy themes for investors to play.

"The biggest near-term concerns involve both the economy and the question of how quickly banking industry revenues can grow," added John Leonard, senior banking analyst with Salomon Brothers.

Some structural issues, such as the situation in which regulators place a greater burden on banks than on competing financial-services companies, must be resolved for banking to reach its potential, Leonard believes.

"Banks have lately been victims of a round of profit-taking, as people seek to rebalance portfolios by selling stocks that have gone up and buying stocks that have lagged," noted Lawrence Vitale, regional banking analyst with Bear, Stearns.

Yet he continues to see earnings momentum, improving asset quality and solid investment opportunities, since the group is still selling at a discount to the overall market.

Citicorp is a favorite stock of Binder and Leonard. If its credit costs and bad loans come down, earnings power will accelerate dramatically. Improvement in its real estate credit quality is needed, but it has made strides in consolidating operations and pruning management layers, the analysts believe.


Bank of New York and Signet Banking, two institutions drawing new customers with low-rate credit cards, are other Binder choices. So are Mellon Bank Corp., which has had a credit turnaround, and NationsBank Corp, which has accomplished successful acquisitions.

First Union Corp., an efficient bank that has benefited from acquisitions and its strong Southeast region, and Dresdner Bank, a German institution that should be helped by declining interest rates in that country, are additional Leonard picks.

Two California banks heavily in real estate, Wells Fargo and First Interstate Bancorp, are suggested by Vitale. He believes they're effectively focusing on real estate woes and positive earnings surprises could be in the cards. Banks whose balance sheets should improve the rest of this year -- thanks to a Rocky Mountain region revival -- are West One Bancorp, First Security, KeyCorp and Zions Bancorp, Vitale predicted.

Selected S&L; stocks look good.

"The moribund portion of the savings and loan industry was put to rest by the government, leaving a truncated industry in reasonably good health and benefiting from low interest rates," said Jonathan Gray, senior analyst in S&Ls; at Sanford C. Bernstein & Co.

Still, Gray sees a diminished role for banks and thrifts as they lose market share to mutual funds, credit card issuers and government agencies such as Fannie Mae and Freddie Mac.


Two giant Southern California thrifts whose stocks appear attractive to Gray are H. F. Ahmanson & Co. and Great Western Financial. While battered by the recession, both are healthy, with assets of $50 billion and $40 billion, respectively.