Lower Interest Rates Are Bullish For Bank Stocks

While hopes for lower interest rates have energized many stock market niches in the early weeks of 1995, few have shown more obvious benefits than bank stocks.

Dow Jones’s industry-group index of money-center banks climbed 9.29 percent through the third week of February, and that was before hints from the Fed it might cease tightening credit, and the announcement of the proposed acquisition of Shawmut National by Fleet Financial in a merger of big Northeast banks.

That marked a significant comeback from the group’s declines in 1994 as the Federal Reserve repeatedly tightened credit conditions.

But analysts who follow the industry on Wall Street tempered their enthusiasm over all the news with a generous measure of caution.

Banks benefit in a variety of ways from falling interest rates, which tend to stimulate demand for loans and push up the value of bonds and other interest-bearing securities that many banks own in large quantities.

“Loan demand remains very strong,” say Chris Kotowski and Cheryl Swaim, analysts at Oppenheimer & Co., in a recent report on the banking business. “In addition, we note that the group remains statistically cheap.

“While the group in general seems to be poised to do well for the next several months,” they add, “the latter stages of the banking cycle are approaching.”

Kotowski and Swain also warn that bank stocks over the past decade have followed a pattern of faring much better in the first half of the year, with an average gain of 18 percent, than they did in the second half, with an average loss of 4 percent.

Thomas Brown, banking analyst at the brokerage firm of Donaldson, Lufkin & Jenrette Inc., argues that investors who focus on a turn in interest rates and other relatively short-term developments risk overlooking longer-term changes that stand to shake up the world of banking.

“The future of banking involves dramatic, not incremental, change from the past,” Brown declares. “As a result of such change, much greater differentiation will develop in the earnings and stock price performance of banking companies.”