Bank shares still hunkering as Fed boosts rates

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Bank shares still hunkering as Fed boosts rates

Sunday, April 09, 2000

By Patricia Sabatini, Post-Gazette Staff Writer

Just looking at the barrels of money rolling into bankers' vaults these days, you might conclude the industry is enjoying the best of times.

Anita Dufalla - Post-Gazette

Fueled by a humming economy that stoked loan demand and ignited money management and mutual fund fees, banks racked up another year of record profits in 1999. Leading the local parade were stalwarts PNC and Mellon, which each posted double-digit gains and together earned more than $2 billion.

But there's a dark side to the story. Just ask shareholders, who've watched a yearlong tumble in stock prices that's left some banks gasping at two- and three-year lows.

For top executives who thought that facing shareholders at last year's annual meeting was uncomfortable -- when share prices were essentially flat -- this year ought to be downright torturous.

At PNC, for instance, shares recently traded under $40, vs. the $60 range at last year's April 27 annual meeting. Mellon, meanwhile, recently skidded to under $30 a share, down from the $35 range a year ago.

But now for the really bad news: Few observers see a serious, lasting rebound in prices anytime soon.

The biggest bugaboo is anxiety about rising interest rates sapping profits.

"Most people can't see a recovery [in bank stock prices] until interest rates start going the other way," said veteran banking consultant Arnold Danielson of Rockville, Md.

"It's hard to come up with an environment where that will happen within a year. So one has to not feel very good about bank stocks."

It's not that rising rates per se are bad for banks' bottom lines.

On the contrary, because loan rates tend to reprice more quickly than deposit rates, banks that rely on depositors' funds to finance loans actually get a lift as rates rise.

But a lot of banks use borrowed funds to finance loans, which means they also get hit as loan rates rise.

These are the top banks and thrifts in the six-county Pittsburgh region based on deposits as of June 30, 1999. Institutions with less than 2 percent shares aren’t included.
Institution Deposits Market share
(in billions)
PNC $11.9 25.4%
Mellon $11.6 24.7%
National City $7.1 15.2%
Dollar $1.6 3.3%
First Commonwealth*

$1.2 2.5%
Parkvale $1.0 2.2%
Sky** $0.9 2.0%
*Includes deposits of Southwest National Corp., which First Commonwealth acquired in 1999.
**Includes deposits of First Western Bancorp, which Sky Financial acquired at the end of 1998.
Source: SNL Securities, Charlottesville, Va.

Moreover, all banks could be hurt if the Federal Reserve raises rates too much, stalling the economy, or worse, triggering a recession. That would choke off loan demand and lead to growing losses in banks' loan portfolios.

Banks that have done a good job diversifying away from the volatile lending business into money management, mutual funds and other fee-based businesses -- such as Mellon and PNC -- would be hurt less. But even those fee-driven sectors could feel the squeeze.

"We have yet to see what really happens in the mutual fund industry in a downturn," Danielson said. "It's been nothing but up since the industry came into its own in the early 1990s."

Already, higher interest rates are taking their toll on one important sector of the banking business -- home mortgages. The Mortgage Bankers Association predicts mortgage activity will skid by nearly a quarter by the end of the year.

Depressed stock prices also are having a dampening effect on mergers.

Last year, the merger and acquisition business was as dull as a wooden nickel, largely because many of the big players were digesting major takeovers of a torrid 1998.

Activity has been eerily quiet so far this year, mainly because it's not exactly the best time for sellers to get top dollar for their businesses -- or for buyers to use their beaten-down stock to finance takeovers.

"You just don't have very excited people on either side of the [merger] table," Danielson said.

Veteran Pittsburgh stock watcher Robert Kanters sees opportunity in the lowly stock prices.

"I'm buying bank stocks," said the Legg Mason research director. "I know I'm getting a good value."

Kanters calls price/earnings ratios for the group "ridiculously low," and notes that some battered issues are now paying attractive dividend yields in the 6 percent to 7 percent range.

There's also the possibility that a new round of bank mergers eventually will break out, driving up the entire sector.

"You could take a dart and throw it at a list of banks and probably come up with a list you're comfortable owning," Kanters said.

Maybe. But with annual meeting season heating up, there have got to be plenty of chief executive officers crossing their fingers, hoping shareholders leave their darts at home.