Third Fed Rate Cut Seen Reviving Bank Stock Prices, Deal Momentum

American Banker, November 19, 1998 | Go to article overview
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Third Fed Rate Cut Seen Reviving Bank Stock Prices, Deal Momentum


By PADGETT, TANIA

Bank share prices have bounced back so sharply on the expectation that the Federal Reserve's rate cutting campaign will boost profit margins that some see another wave of consolidation shaping up.

After the Fed announced its third rate cut in two months Tuesday afternoon, investors snapped up bank stocks, driving them higher even as blue chip stocks fell.

In a report issued Wednesday, veteran bank analyst Thomas Hanley of Warburg Dillon Read declared Federal Reserve Chairman Alan Greenspan "man of the year" because his policymaking has created "an economic environment within which bank stocks have flourished."

Mr. Hanley said the Fed's focus on restoring the yield curve "should bode well for net interest revenue growth and, consequently, bank stocks."

Lower short term rates are seen as a boon because they enable banks to make money on long-term loans. Lower interest rates also prompt borrowing and add liquidity to a market that was atrophying because of the financial turmoil in the international markets.

Portfolio manager James Ellman at the GT Global Financial Services Fund said the series of rate cuts so far is sufficient to alleviate the credit crunch that many market watchers feared was coming.

"There still may be pockets or situations where banks are pulling in their horns to the riskier borrowers but creditworthy borrowers are able to secure borrowing now," said Mr. Ellman.

Mr. Ellman added that some banks will eventually be able to make money off the marginal borrower because as the competition for borrowers dries up, those few bankers will be able to charge high rates.

The higher bank stock prices that have resulted from the rosier expectations mean stronger currency for acquirers, who typically pay for deals with stock, Mr. Ellman added.

Still, though bank shares have rebounded, the S&P bank index remained 17% below its July peak at the close of trading Wednesday.

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