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   | 2000 Globe 100 |

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The Boston Globe OnlineBoston.com Boston Globe Online / Business / 2001 Globe 100

Banks suddenly seem sexy

By Scott Bernard Nelson, Globe Staff, 5/22/2001


istinctly old economy, bank stocks haven't been the sexiest investments in recent years. Technology stocks, in fact, made their financial services brethren look positively homely in comparison.

But last year brought a different kind of Wall Street fashion show.

With the dot-com bubble bursting and investors fleeing high tech in droves, plain vanilla suddenly regained its allure.

From the end of the first quarter of 2000 to the end of the first quarter of this year, the S&P Major Regional Bank index gained 19.1 percent for investors.

While that hardly stands out next to the triple-digit returns that were par for the course in the dot-com world of the late 1990s, it sparkles next to the wider market returns of the past year.

Over the 12 months ending March 31, the Nasdaq Composite index lost 59.8 percent of its value. And the Wilshire 5000 index, arguably the best proxy for the overall US market, dropped 25.5 percent.

''Banks really had an excellent year,'' said James Moynihan, a senior vice president and banking analyst in the Boston office of Advest Inc. ''Stocks generally went up, and we saw more dividend increases than we have during any recent period.''

The investment world's change of heart clearly helped to boost bank stocks. It wasn't, however, the only factor working in their favor.

The slowing economy and the reversal on interest-rate policy it spawned at the Federal Reserve Board also drove down the cost of banks' raw material: money.

And falling stock prices tied to the economic slowdown convinced a larger number of Americans to park their cash in banks rather than in the financial markets, driving up deposit levels.

On the other hand, the newly uncertain environment made lending a lot trickier for the people who manage banks.

As US businesses began to feel the pinch, some stopped paying back their loans. That trend made the level of nonperforming loans at banks start to inch upward, hitting heights not seen for a couple of years.

The biggest problems developed with the biggest loans. Syndicated loans, in which a group of banks band together to make a single jumbo (and often riskier) business loan, proved to be especially problematic.

While that caused more than a little consternation among banks and bank analysts, it also limited the scope of the problem.

Since few small and midsize banks get involved in the syndicated-loan business, the trouble was largely limited to larger institutions.

So far, at least, it also limited the problem to commercial loans.

''We are beginning to see softness,'' said Thomas J. Hollister, chief executive of Citizens Bank of Massachusetts. ''But we haven't seen it on the consumer side, which is very good news.''

Still, it's not clear sailing ahead for bank stocks. After posting strong earnings and profit numbers in 2000, banks at all levels struggled during the first quarter of this year.

In addition to growing problems in bank loan portfolios, loan growth is slowing down, and capital-markets divisions are taking it on the chin. (Capital markets divisions deal with the buying and selling of investments, as opposed to more traditional bank products, such as loans and savings accounts.)

Analysts have also started publicly wringing their hands about whether banks have cannibalized their reserves to boost earnings in recent years. If so, a fall could be in the offing.

And the big question mark, everyone agrees, is whether the US economy will slide into a full-blown recession in the year ahead.

If not, banks are likely to be fine. But if so, all bets are


''We think there's probably a two-to-one chance we're going to skate through without a recession,'' Hollister said. ''If we do have one, banks will suffer, alongside their clients.''

Scott Bernard Nelson can be reached by e-mail at nelson@globe.com.


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