Banking Industry Is Holding Its Own

THE banking industry - despite loan-loss problems for some institutions - appears to be in a favorable position to profit from the economic recovery under way throughout the United States.

Since the beginning of 1992, US bank stocks in general have outperformed most stock market indexes. A number of banks have watched their highly depressed stock values soar, including First City Bancorp, MNC Financial Corporation, Continental, and Citicorp; those stocks have risen more than 50 percent since the end of last year, according to Prudential Securities Inc.

In addition, nonperforming assets such as bad loans are declining throughout the industry. Mergers are creating larger and better capitalized institutions: The latest merger occurred last week when Ohio-based Banc One agreed to buy Valley National Bank of Arizona for stock worth $1.2 billion.

Besides benefiting from the improving economy, most banks are breathing a sigh of relief that the industry has not been hurt by the downturn in the Japanese stock market. In past weeks there has been speculation that some US banks with special ties to Japanese institutions might be hit by the current travail of Japanese banks, which have incurred substantial losses on the Tokyo exchange.

In fact, the share prices of one or two large US banks initially dipped on the unhappy news out of Tokyo. But those US stocks have recovered.

"The few US banks that might possibly be affected are large money-center banks," says Joseph Roberto, a bank analyst with Advest Inc., a financial house. "Regional banks should not be adversely affected by Tokyo's problems."

Moreover, concerns that the financial problems of real estate magnate Olympia & York might damage some US banks also appear to be waning.

Little wonder then that many analysts now mull the possibility of a strong year for the banking industry. Bert Dohmen, publisher of "The Wellington Letter," in Honolulu, says that regional banks and savings and loan associations may represent one of the hottest sectors for investors. His rationale: Banks should soon start writing new loans to reflect improvements in the economy; nonperforming loans will decline; and commercial banks - eager for expansion - will start eying some S&Ls as potential takeover

candidates.

He is not alone in his upbeat assessment. Bank analysts for Prudential Securities concluded in a recent report that "we have not been this optimistic since 1989." They maintain that the appeal of the banking group is based on low valuation levels and high earnings that should be boosted by economic recovery. Prudential concludes that while 1992 earnings won't be "robust," the industry's overall "momentum is positive."

And bank analysts Thomas Brown and Frank DeSantis Jr., of Donaldson, Lufkin & Jenrette, an investment house, say that both money-center banks and regional banks must be considered "favorable" stock sectors.

Regarding regional banks, the two analysts note that bank stocks can be productive investments in the early stages of an economic recovery. Loan losses are expected to decline for the regionals, they assert; and healthy consolidation continues to occur throughout the industry, enhancing growth rates.

Regarding large money-center banks, not only are loan losses expected to decline, but "the trend in expenses is flat to down," Mr. DeSantis says.

Most analysts advise caution in acquiring bank stocks, given current commercial and industrial loan losses reflecting the economic slump. Still, "industry fundamentals are improving," says Mr. Roberto of Advest.

Strong performers noted by Advest include CoreState, Equimark Corporation, and Key Corporation in the Mid-Atlantic region, Banc One in the Midwest, and Norwest in the Upper Midwest.