Banks Stocks Hurt by Recession

IT'S hardly surprising that holders of bank stocks are watching the financial pages of the daily papers with special care these days, following the federal takeover of the Bank of New England Corporation. It is expected to be the third most costly bank rescue ever, at an estimated $2.3 billion. ``We're clearly in a difficult economic period for the banking industry,'' says Thaddeus Paluszek, an analyst with Kidder, Peabody & Co. Inc. Both the current recession and uncertainty over the Gulf are are now hurting the industry, Mr. Paluszek says. His advice: Investors should be wary of bank stocks, and look for institutions ``that have exhibited a clear history of quality'' corporate performance and have ``solid capital positions.''

The Federal Deposit Insurance Corporation (FDIC), the main federal agency insuring commercial banks in the US, anticipates between 170 and 200 bank failures this year. That compares to 180 failures during 1990.

At the end of last year, the FDIC had assets of around $9 billion. But some $5 billion in insurance funds are expected to be dispersed in 1991, leaving the fund with around $4 billion. FDIC Chairman L. William Seidman is calling for a recapitalization of the fund by the banks. He suggests a one-time assessment of $1 per $100 of deposits to raise $25 billion plus an increase in the insurance premium.

Bankers are concerned that such a new requirement would cut into their profitability at a time when bank earnings have been in sharp decline.

The Bank of New England announced last Friday that it expected losses of $450 million in the fourth quarter of this year. Wall Street already knew that the Boston-based bank was in financial trouble. It's problems, experts say, were largely self-generated, and go beyond the regional economic downturn. The bank was caught with huge losses on real estate loans. It served primarily household customers, lacking the diversity of a key competitor, the Bank of Boston, which has more foreign and corporate business.

The banking woes of New England are not expected to be quickly repeated in other parts of the US, Paluszek says.

The Southwest has already had its banking downturn. Indeed, the two largest federal bailouts involve Texas institutions.

However, a number of banks in the mid-Atlantic region have been hard-hit by the slumping economy and the downturn in the real estate market; even large money-center banks such as Citicorp, the nation's largest commercial bank, have been laying off employees to control costs. Banks in the upper Midwest and West have so far managed to escape much of the hardship facing the big East Coast banks.

As a group, bank stocks were less than stellar performers during 1990, a situation expected to be repeated this year. Large loan write-offs were commonplace. Earnings were down throughout the industry, as were many individual bank stocks. Salomon Brothers' list of 35 bank stocks is off a hefty 50 percent from just a year ago. And both money-center banks (mainly based in New York City) and regional banks were among the bottom performers of all stock groups in the Standard & Poor's 500 stock index for 1990.

Consolidation and restructuring will continue throughout the industry, and probably well into the decade, says Alison Deans, an analyst with Smith Barney, Harris Upham & Co. Benefiting from the consolidation will be large regional banks with good balance sheets, many of them from the Sun Belt, upper Midwest, and West.

Bank stocks, Ms. Deans believes, hit their lows sometime during the fourth quarter of 1990. She sees some upturn later this year, assuming that the economy rebounds. She is even recommending some bank stocks, including Bankers Trust and J.P. Morgan.

Mr. Paluszek is also recommending J.P. Morgan, as well as such strong regional banks as First Wachovia (Winston/Salem, N.C.), SunTrust (Florida), Norwest (Minneapolis), and, Banc One, in Ohio. Banc One and Wells Fargo have been mentioned as possible buyers of Bank of New England.

An analysis by Salomon Brothers suggests that the 35 largest banks could show a minuscule profit margin of around 2.5 percent in 1991.