Follow up on Xès comment on regional banks:
How Long Can Regional Banks Keep Rising?
Rate cuts will continue to help, but some funds see move near end
By Monika Tjia
Investor's Business Daily
When the Federal Reserve cuts rates, regional banks often reap the benefits early on. So far this year, the stock performance of regional banks and thrifts has outpaced that of other sectors.
With the economy in a downturn and tech stocks in the dumps, some savvy mutual funds have managed nice gains from regional banks. But the party may soon be nearing an end.
Scan IBD’s 197 industry groups and you’ll find regional banks among the best performing groups. Four of the five regional bank groups rank in the top 50. The highest is Banks-Northeast, currently No. 15. In the past nine weeks, the group’s rating has ranged from 14th to 28th.
Preparing For The End
How long will this last? The Fed recently cut rates for the seventh time this year, but mutual fund managers are fully prepared for a shift in the economy.
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“We think that at some point the easing cycle is going to near the end. The Fed can’t lower rates forever,” said Kelly Ko, co-manager of Pacific Capital Small Cap Fund.
While the consensus seems to be that rate cuts are nearing an end, John Fox, co-manager of FAM Value Fund, says the benefits of the cuts will last into 2002. “(Rate cuts) will probably help the first quarter of 2002 and then will flatten out.”
Regional banks have already felt the selling pressure. On Friday, brokerage Keefe Bruyette & Woods cut its investment ratings on four New York banks, including New York Community Bancorp (NYCB) and Staten Island Bancorp (SIB).
In the last year, New York Community Bancorp tripled in price. After the downgrade, it tumbled 13%. The stock’s Accumulation/Distribution Rating has slid to D+.
As of the June reporting period, A+ rated Evergreen Special Equity Fund held 46,000 shares of New York Community.
Evergreen Special Equity also holds five other regional banks. But Tim Stevenson, co-manager of the fund, says he has his eye on other financial sectors as well.
Stevenson favors Investors Financial Services (IFIN). At 1.7% of the fund’s assets, it’s the largest financial stock holding in the portfolio. The firm provides back-office administration services for mutual funds and other asset managers.
The stock has been a flat performer since peaking in December. But Stevenson predicts investors may find strength in financial services as regional banks move to the sidelines.
Evergreen Special Equity is slightly underweighted in banks vs. the Russell 2000. “The major gains have been made in the group,” Stevenson said. “You have to be a little pickier with the names you focus on. Many have rallied very strongly in response to Fed action and in anticipation to further Fed action. But we’re near the end of that.”
As regional banks move out of the limelight, Stevenson is pointing his radar at other areas. He feels sectors other than financials will lead the market’s next move up. “We see some recovery in heavy cyclicals and industrials, and we expect a pop in the tech sector,” he said.
Clean Balance Sheets
Besides a positive interest rate environment, regional banks have rallied on clean balance sheets and a lack of exposure to the capital markets, Fox said.
Fox’s B+ rated FAM Value fund holds five regional banks; each makes up about 2% of its assets. Bought in late 1999, North Fork Bancorp (NFB) was the fund’s most recent bank buy. In the last 12 months, the stock has risen 72%.
What sets North Fork apart from other banks is that it focuses on getting low-cost deposits. “That helps them be very profitable,” Fox said. “They probably have one of the lowest expense ratios out there. They’re very efficient.”
Recently North Fork followed regional banks down. The stock has an 86 Relative Price Strength Rating and a 91 Earnings Per Share Rating. It stands 11% off its peak.
Besides North Fork, FAM Value holds two other northeastern banks: Banknorth Group (BKNG) and TrustCo Bank Corp NY (TRST).
Financials are the heaviest weighted sector, making up 40% of FAM Value. “We normally have more financials than the market,” Fox said. “We added to them quite a bit in 1999 and early 2000. They were ridiculously cheap.”
Just like FAM Value, financials are the heaviest weighted sector in Pacific Capital Small Cap. Compared with the Russell 2000, the fund is slightly underweighted in financials. But banks make up 10.6% of the fund’s financial stocks. The bank weight in the Russell 2000 is 10%.
The fund is picky about which banks it buys. “We’re very conscious of valuation. We’re looking for improvement in credit quality. We’re looking for a management team that’s going in and cleaning up past problems or dealing with the current environment,” Ko said. |
