Bank stocks remain in doldrums; Overseas woes in '98 began the decline


TOM FINUCANE started to worry two years ago when the mutual fund he co-manages began soaring beyond his expectations.

The John Hancock Regional Bank Fund finished 1997 with a 54 percent increase -- an unusually high return for a mutual fund that invests in stocks that typically advance more moderately.

"I was basking in the sun. The companies were doing well," he said. "But the market was bidding them up. The stocks were somewhat over-bought, the merger premiums were too high. It was unsustainable."

Finucane and the team that manages the Regional Bank Fund are suddenly finding themselves on the wrong end of the market. The Regional Bank Fund is down 8 percent for the year.

"It has been a tough year," Finucane said. "We started off slow, we had some glimmers of hope in the spring and the early summer, and then it just rolled over."

Bank stocks began losing their luster in 1998, and they still haven't recovered.

The SNL Bank Index, which is put out by Charlottesville, Va.-based SNL Securities, is down 4.9 percent year to date. Last year, the index was up 5.9, and in 1997 it rose 48.1 percent.

The performance "has just been awful," said Scott Cooley, a senior analyst at Morningstar Inc., a Chicago-based company that tracks the mutual fund industry. "Just about anything that could go wrong has."

Banks were one of the main drivers of the bull market in 1997. They benefited from the robust economy, low interest rates and low inflation. In return, they churned out record profits and maintained clean loan portfolios. As they soared, so did the stock market.

But the sentiment changed in 1998 when investors became nervous that economic problems in Asia and Latin America would cause a slowdown in the United States. The fears were further fueled by the collapse of Russia's ruble.

Since then, a combination of factors, including fewer bank mergers, higher interest rates and worries that banks may be facing credit problems, has hurt the stocks, the experts say.

There have been just 265 bank and thrift mergers this year, valued at $71.9 billion. That compares with 503 deals last year, valued at $285.7 billion.

The Federal Reserve Board hasn't helped by raising interest rates twice this year, and it is leaning toward raising them again.

"It has really hit a lot of these stocks this year," Cooley said.

To make matters worse, there have been major stumbles by First Union Corp., which said in the spring that it would lay off 5,000 employees, and by Bank One Corp., which warned about slower growth in credit cards.

"It affects people's sentiment toward the sector," Cooley said.

James Record, director of bank and thrift research at SNL Securities, says investors are worried that bank profits are slowing and loan problems will surface.

"Banks have been achieving record earnings year in and year out for the entire decade," he said. "I think it is becoming apparent that it is not sustainable."

But Finucane is convinced that now is the time to scoop up cheap bank stocks. He doesn't favor the big companies like Bank One and First Union, but such smaller regionals such as First Tennessee National Corp. of Memphis, Detroit-based Comerica Inc. and Commerce Bancshares of Kansas City, Mo.

He is optimistic that profits will be strong in the third and fourth quarters, and if banks get through the dawn of 2000 without too many problems, their shares should be poised to rebound.

"I think it is starting to come back, we are starting to bottom here," he said.

Finucane doesn't like this "feast-or-famine" cycle the fund is in. "We don't want boom, we don't want bust," he said. "We want nice, steady returns."

Pub Date: 10/10/99

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