Many Banking On Mergers To Lift Stocks

Bank of Boston Corp. and Chase Manhattan Corp. are trading at or near 52 week highs because investors think takeovers there are imminent.

The bank merger mania - which has driven bank stocks up about 40 percent this year as measured by the Standard & Poor’s Money Center Banks Index - hasn’t stopped Thomas Whitman, managing director at Memphis-based Highland Capital Management, from selling some bank stocks.

“Bank stocks are at the upper end of their historical values,” said Whitman, who said he’s been scaling back toward a market neutral position in bank stocks.

“I’m not overly bearish on the group, but earnings growth will be more difficult, loan growth is slowing and the industry is extremely competitive,” he said of his reasons for selling.

Scott Edgar, director of research at Sife Trust Fund in Walnut Creek, Calif., which runs a $530 million mutual fund dedicated to bank stocks, said he too has been selling some shares and now has about 20 percent of his portfolio in cash.

Nonetheless, he said bank stocks could rise another 10 percent or 15 percent. He picks include Bank of Boston, Integra Financial Corp., Mercantile Bancorp., Chase, Boatmen’s Bancshares Inc. and Hibernia Corp., all possible takeover targets.

He said one risk to the group is that investors will decide to sell to lock in some of the profits, thus driving down bank stock prices. That, in turn, could dampen the acquisition trend, since virtually all bank mergers are done with stock.

Edgar said he’s sold some smaller banks, including Barnett Banks Inc., which has climbed almost 45 percent this year, and Corestates Financial Corp., which is up 41 percent.

Jim Schmidt, portfolio manager of the $1.1 billion John Hancock Regional Bank Fund agrees that the second half of the year won’t be as strong as the first. Still, he hasn’t been selling, in part because he expects merger activity to continue.

That’s why he likes mid-size regional banks like First Tennessee National Corp. and Mercantile. He said these banks will be particularly ripe for takeover after a new interstate banking law goes into effect in September. The law will allow banks to form a nationwide holding company, rather than having to operate separately chartered banks in different states, which is much more costly.

Some managers, however, are still very bullish. William Miller, president of Legg Mason Fund Advisor, said 40 percent of his $2 billion portfolio is in financial stocks, and the majority of that is in bank stocks. He’s not planning any changes.

Miller says that’s because bank stocks will be one of the market movers of this decade, thanks to the current economic environment of low nominal growth and low inflation.

He expects banks to see above-average earnings, 6 percent to 7 percent in nominal terms, compared with 5 percent or 6 percent for the market as a whole.