Magazine article American Banker

While Market Is Hot, Bank Shares Are on Fire

Magazine article American Banker

While Market Is Hot, Bank Shares Are on Fire

Article excerpt

Bank shares are out in front of the historic rally in the stock market.

The American Banker index of bank stocks has surged 17% so far this year, while the Standard & Poor's 500 stock index is up 8.5%. The Dow Jones industrial average has improved 8% while crossing the 7,000 mark.

Bank shares continued to climb Friday, even as the broader market took a breather.

"The banks are probably at peak levels of profitability, and asset quality is as good as it's ever been," said bank analyst Kenneth F. Puglisi of Sandler O'Neill & Partners, New York. "Plus, they have more capital than they can use, and they are buying back stock."

Though some observers warn of a possible downturn for bank shares, many see the good times continuing.

"The worries of a year ago-that inevitably higher provisioning levels would (depress) bank earnings growth-appear to have been unfounded," said Marni Pont, an analyst at Keefe, Bruyette & Woods Inc., New York.

The bank rally, which has accelerated in the past two weeks, comes as the general market is hitting unprecedented highs.

The market is being lifted by "benign news on inflation and interest rates and by another load of cash that was dumped into the eager hands of mutual fund managers," Mr. Puglisi said.

Indeed, the mutual fund industry last week estimated that $24 billion had poured into stock funds during January, the fourth-largest monthly inflow on record.

January is typically the strongest month of the year for such inflows, as new 401(k) retirement plans are established and employers match employee contributions to existing plans. But strong inflows have continued into February.

"This is a liquidity-driven market," Mr. Puglisi said. But he emphasized that banks are also benefiting from their fundamental appeal right now.

Despite their impressive gains, bank stocks generally continue to trade at a discount to other stocks on a price-to-earnings basis, Mr. …

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