Magazine article American Banker

Money Managers Disparage Bank Stocks amid Rising Rates, Strong Competition

Magazine article American Banker

Money Managers Disparage Bank Stocks amid Rising Rates, Strong Competition

Article excerpt

PASADENA -- The Montgomery Securities annual financial institutions conference gives bank executives the opportunity to hear what is on the minds of the bigshot investors who buy stocks in their companies.

The experience is not always pleasant.

This year's gathering in Pasadena, Calif., which ended last Friday, came after two years of record profits for banks. Asset quality problems are receding and balance sheets are flush with capital.

But as bank senior executives gave one speech after another about their revitalized institutions, now lean, mean and financially sound, money managers privately disparaged bank and thrift stocks.

Banks may now be sharply focused on building revenue. And with the economy gathering steam, the longed-for return of healthy credit demand may be at hand.

In fact, most banks forecast loan growth in the mid-to-high single digits this year.

So if the bankers were in such good cheer, why were investors so morose?

Nonbank Competitors

For one, rising interest rates are likely to take a bite out of profits in the short term, they predicted. And, over the long haul, they warned, banks are being outhustled by nonbank competitors in mortgages, credit cards, commercial finance, consumer investments and virtually every other business line.

"Bank are losing share of wallet," said the manager of a fund that invests hundreds of millions of dollars in financial institution stocks.

Many touted the stocks of mortgage banking and specialty credit card companies. Said a stock picker for a New York investment partnership: "When I visit the nonbanks, I talk with entrepreneurs. When I visit the banks, I feel like I'm talking with bankers, not businessmen."

Bull Market Fortunes

Of course, many of today's investors who come down so hard on banks made fortunes during the bull market for bank equities in 1992 and 1993, before bank share prices started drifting downward.

Whatever fancy explanations they offer for their pessimism merely dress up a trader's conviction that the bank stock rally played itself out last year.

While acknowledging that the industry faces unprecedentedly tough competition, bankers seemed frustrated by the lack of respect from investors. Several complained loudly that their stock trades at what seems to them unreasonably low multiples to earnings and look value.

Banc One Corp. chairman and chief executive John B. McCoy spoke for many when he questioned Wall Street's judgment in driving down the Ohio-based bank company's share price 25% in recent months, despite record profits.

"At some point, the market will realize that Banc One is healthy and doing well," he said.

Branch Networks

Bankers are putting their branch networks under the microscope and they are not liking what they see.

This intense scrutiny of branch banking produced some lively discussion at the Montgomery conference.

Several trends are forcing bankers to overhaul their retail operations.

Maintaining a far-flung network of facilities, each with its own staff, is expensive. In a deregulated financial marketplace in which banks compete with providers who use the mail and telephone to reach customers, branches may produce a severe cost disadvantage.

At the same time, a growing proportion of customers rarely visit branches, especially those who are younger and wealthier. Instead, they use alternative delivery systems, including telephone banking and automated teller machines.

"The cost of branches goes higher and higher and people are becoming more and more comfortable with technology," noted Charles E. Rice, chairman and chief executive of Florida-based Barnett Banks.

Still, neither Barnett nor other bank companies are prepared to give up their branch networks. The neighborhood retail office is one of the critical assets banks have that competitors lack. …

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