Are Bank Stock Fearmongers Shooting Blanks?

Also, more turmoil at Tiger and <I>CNBC</I> holds its tongue.
Author:
Publish date:

The Reflex, Flex ...

Strength in techs

today was impressive, but market players continue to fret about financials. The

Philadelphia Stock Exchange/KBW Bank Index

fell 2% and is now down 19% from its all-time high on April 27.

The BKX's latest decline was attributed, on the one hand, to another upturn in bond yields and, on the other hand, to a

Wall Street Journal

article which detailed the "gathering storm" in banks' balance sheets, namely their commercial loan portfolios.

If the

Journal

says it, it must be so. So let's move on.

Oh wait, that's right. The whole point of this column -- and

TheStreet.com

itself -- is to not take things at face value, regardless of the source.

"There is not a pattern of increasing commercial loan problems that are significant in any way," said Mark Davis, vice president of research at

Banc Stock Group

, a financial industry research and investment house. "There is an overall increase

in problem loans but it's relatively minor. And while there have been significant problems in select institutions

such as

Summit Bancorp

(SUB) - Get Report

, it's not industry-wide."

A big factor in the declining reserves -- which Davis acknowledged is "an issue" for some institutions -- were the heavy write-offs taken by "very biggest institutions" in the third quarter of 1998 because of their exposure to Russia, Asia and Latin America. But "regional institutions that didn't have the same overseas exposure and write-downs have reasonably good reserves," he said.

Moreover, loan activity represents only 42% of all revenue generated by bank holding companies vs. more than 80% a decade ago, Davis said. Banks have new revenue streams (ie: fees) to keep cash coming in even if there were some large systemic problem, he said. (Which there ain't, he claims, in case you weren't paying attention.)

And as loans declined as a percent of their revenue base, banks are not the "interest-rate sensitive organisms" they are perceived to be, he continued. Also, technological developments helped banks "dramatically" improve management of their "asset-liability mix," he said, to the point where they are "interest-rate neutral."

Moreover, higher interest rates are actually

beneficial

to some banks, Davis claimed. As rates rise, adjustable-rate loans (including mortgages and credit cards) generate more revenue. Simultaneously, banks' cost of funds is nada for noninterest bearing deposits (like some checking accounts), which total 16% of deposits for the average U.S. bank. Thus: "net margin increases," he said. The real danger is if higher rates cause recession, he argued. Looking at today's

retail sales

report, "obviously interest rates have not gone up anywhere near enough to slow this juggernaut."

Davis recommends

First Republic Bank

(FRC) - Get Report

and

North Fork Bancorp

(NFB)

, in which Banc Stock Group's investment arm holds long positions.

"No question, we've got a conflict of interest," he said (probably with a smile, although we were on the phone so I can't verify).

Brian Gilmartin, a portfolio manager at

Trinity Asset Management

, agreed that the issues raised by the

Journal

are "not that big of a deal," especially since the financial industry is "awash in capital."

Banks are far better equipped to handle loan problems (should they arise) than in the past, he said. Furthermore, it's usually something new or unforseen that brings the next big problem.

"It's never the same thing that comes back to bite you on the ass."

Gilmartin would "definitely be buying" financial stocks in their current weakened state. He recommends (and is long)

Bank of America

(BAC) - Get Report

,

Chase Manhattan

(CMB)

,

First Star Bancorp

(FSAR)

,

Fifth Third Bancorp

(FITB) - Get Report

and

Zions Bancorp

(ZION) - Get Report

, which recently agreed to merge with

First Security

(FSCO)

.

River City for Tiger

In the wake of

last night's report about turnover at

Tiger Management

, a source noted the hedge fund is a major shareholder of

Federal Mogul

(FMO) - Get Report

, which tumbled 22.9% today after its profit warning

late Monday.

Indeed, Tiger held 8.5 million shares of the automotive parts maker as of June 30, according to federal filings. A source close to the fund said the position has been "significantly" reduced since. Still, it's safe to say Tiger suffered another in a growing string of major ouches.

Tiger's spokesman (who I suspect is getting sick of hearing from me) said Tiger doesn't comment on its positions. Federal Mogul's spokeswoman declined to comment on the firm's stock or shareholders.

The Walls Come Tumbling Down

Criticism that

CNBC

engages in market "cheerleading" suddenly has a more serious implication after the network announced it will acquire a 12.4% stake in

Archipelago

, an electronic communications network. Terms were not disclosed.

CNBC

is not the first media outlet to take a stake in a trading vehicle, but there's something not quite right about this deal. None of

CNBC's

media counterparts in ECN-land --

Bloomberg

,

Dow Jones

(DJ)

and

Reuters

(RTRSY)

-- has a parent which could have made the investment, much less a parent such as

General Electric

(GE) - Get Report

.

Moreover, as

TSC's

Dan Colarusso

pointed out to me, GE is a major shareholder in

Paine Webber Group

(PWJ)

, which seems a more natural fit for such an investment.

I didn't see/hear it, but I understand

Mark Haines

was squawking (pun intended) about the deal this morning. Haines could not be reached for comment. His

CNBC

colleague,

Ron Insana

, agreed to talk about it, if the network's PR folks cleared it. A network spokeswoman wouldn't give him permission to discuss it. She merely reiterated the company's position that it will deal with whatever conflict arises. (See

TSC's

story on the

CNBC

investment.)

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

taskmaster@thestreet.com .