Magazine article American Banker

Thrift Stock Rally May End If Fed's Rate-Cutting Does

Magazine article American Banker

Thrift Stock Rally May End If Fed's Rate-Cutting Does

Article excerpt

As the main beneficiaries of interest rate cuts, thrifts have ranked high among Wall Street's favorite stocks and have risen steadily since early last year.

But if the Federal Reserve's recent aggressive interest rate reduction policy has peaked, as many believe, some observers warn that the conveyor belt that moved thrift stocks along could go into reverse.

Thrifts are not the place to be for cautious investors when interest rates are rising, said John Kline, an analyst at Sandler O'Neill & Partners. He was quick to add that the current environment is far from one in which the Fed might feel the urge to raise rates.

The expansion of net interest margins due to the Fed's easing should slow but not come to a halt in the next quarter, and that should continue to give savings banks visible earnings, he said. (See story on page 9.)

Seattle-based Washington Mutual Inc. was among those benefiting most from the recent trend; its net interest margin rose to 3.21% in the second quarter, up 78 basis points from the same period last year. Mr. Kline pointed out that most of Washington Mutual's loans are fixed-rate products, though, and most analysts agree that lower interest rates have worked their way through adjustable-rate mortgages and the adjustable-rate lenders will not benefit much longer from the lag effect between rate cut and rate adjustment.

The margin of Golden West Financial Corp. in Oakland, Calif., expanded by 57 basis points, to 2.92%, in the second quarter, but Jonathan E. Gray of Sanford C. Bernstein & Co. wrote in a research note Thursday that the stock had outperformed the market by 36% since he upgraded it on Jan. …

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