Bank Stocks Outperform Most Major Market Indexes

THE United States commercial banking industry, which saw profits rise for the second year in a row in 1993, is once again posting solid financial gains at this midpoint in 1994.

Sparked by a lively economy, strong demand for loans from consumers and especially businesses, and fewer losses on problem loans, the value of bank stocks rose sharply earlier this year. Between April and mid-June, their prices climbed 10 to 12 percent. And the bull market for banks is not over yet.

``Fundamentals remain very favorable,'' says J. Frederick Meinke, a bank industry analyst with investment house Kemper Securities Inc. in Chicago.

Dennis Jarrett, chief technical analyst for investment house Kidder, Peabody & Co., says he sees the large money center banks - as well as financial institutions in general - showing continued ``leadership'' on Wall Street among major stock sectors.

Financial stocks, including bank stocks, plummeted to a low point on the Standard & Poor's 500 in 1990. This year, both large money center banks and smaller regional banks have managed to outperform the broader market.

Beating market indexes

Still, many investment houses, such as Donaldson, Lufkin & Jenrette Inc., say the recent heady pace of bank-stock gains may be abating or may even be over. Even if bank revenues grow at a slower pace, banks are expected to turn in sizable profits, coming close to equaling - or possibly exceeding - last year's results, some experts say.

``We fully expect bank stocks to outperform most major market indexes this year,'' Mr. Meinke says. Operating revenues are strong, he notes. Consumer loan growth is also sizable. But it is not as large as before the recent round of interest-rate hikes, which caused many homeowners to pull back from plans to refinance mortgages or other big-ticket charges. Bank credit costs have been leveling off, Meinke says. Further, many banks have been posting financial recoveries on real estate losses that had been charged against profits in previous years.

Corporate lending, meanwhile, has been soaring. It is up 6 percent over 1993 levels. At the same time, banks are vying with each other to finance mergers and acquisitions.

The current optimistic outlook for the banking industry is buttressed by federal statistics showing that fewer banks are reporting losses and inadequate capital levels. And the amount of problem loans has shrunk.

Only 487 banks reported a net loss for the first quarter of 1994, down from 583 banks in the first quarter of 1993 and 1,417 banks in the first quarter of 1991, according to Veribanc Inc., a Wakefield, Mass., research company that monitors banks.

California still struggling

``The numbers are quite good, but not yet perfect,'' says Warren Heller, research director at Veribanc. Pockets of problem banks remain around the US, particularly in California, where the local economy is still struggling to break free from the economic downturn of the early 1990s. But most problem banks today are linked to unique local situations, rather than national economic or bank industry problems, Mr. Heller says.

``If the second half of 1994 follows the pattern of the first half, the banking sector should do very well,'' he says.

The likely enactment of an interstate banking bill now before Congress is expected to help the industry. Both the Senate and House of Representatives have passed versions of the measure. The rival bills are now in a conference committee.

Industry officials had expected the final bill to be on President Clinton's desk for signing before Congress leaves for vacation in August. Now that timetable is less certain because the banking committees have turned to other considerations, including an examination of the Whitewater political controversy.

``But we still expect the bill to clear Congress this year,'' an official with the House Banking Committee says.

With a few exceptions, the bill would allow most banks - or bank holding companies - to purchase other banks in any state following a one-year waiting period.

There are about 11,000 commercial banks in the US. Close to 8,000 of these are small, with assets under $100 million. Their total assets represent only about 9 percent of the $3.7 trillion total for US bank assets.

A new round of consolidation can be expected after final passage of the interstate branch banking law, says George Salem, a banking analyst with Prudential Securities Inc. in New York. That could lead to a new ``bank stock rally,'' he contends.