Once more, with feeling. Because they botched the nation's savings and loan situation big-time, everybody in Washington is now shaking a fist at the banking industry to try to show belated toughness. On a given day, it's a case of which agency or congressman can come up with the scariest estimates of impending banking doom. There are indeed significant problems that must be worked out, and their solutions are likely to cost all of us plenty, yet this destructive posturing has left the average saver quaking in his pocketbook.
Worried folks have pulled significant amounts of money out of commercial banks in the hubbub. Meanwhile, stocks of U.S. commercial banks have plunged on fears that their earnings will decline significantly due to worsening real estate loan portfolios and other loan losses. The fact that 80 percent of the thrifts sold have been acquired by commercial banks does worsen their earnings situation. Small-bank failures around the country also continue to grow. Major employee cutbacks and writeoffs by giant banks such as Chase Manhattan don't serve to boost confidence either.But while realizing that there is a problem that could worsen, don't panic.
"Rest assured, there will be an end to this lunacy in Washington, which has been devastating in the degree in which it has been frightening people," said Dick Bove, senior vice president with Dean Witter Reynolds Inc., who believes many of the reports being bandied about are overblown or extrapolate wildly incorrect conclusions.
Realize that the nation's banking system is there for a reason that still exists and that it retains its safeguards for the saver.
"The real bottom line is that the saver's money is absolutely safe with insurance to the $100,000 level," emphasized James Rosenberg, senior vice president with Lehman Brothers Inc. "There is no reason that anybody should worry, and that is the No. 1 most important thing for everyone to keep in mind."
Also realize that investors in banking stocks won't be too pleased for a while.
"Short-term, there should be continued weakness in the banking stocks, though longer-term prospects look better," predicted Ronald Mandle, senior research analyst with Sanford Bernstein & Co.
Although you should remain calm, don't be a total Pollyanna. "While banking stocks may appear inexpensive, if there is a recession there will be rising loan losses, fear and loathing and rising expenses," warned Brent Erensel, banking analyst with Donaldson Lufkin & Jenrette Securities. "With the income statement so violated, earnings are impossible to predict."
Ironically, one of the most downtrodden banks of the 1980s, BankAmerica Corp., has blossomed as the nation's star institution, primarily because it had to work hard to solve most of its problems in the last go-round. Bank-America's stock is recommended by all four of the banking analysts interviewed for this column. Its loan situation has been cleaned up and it is buying up troubled California thrifts for a song.
Another big bank, Manufacturers Hanover, is recommended by both Mandle and Bove. However, only a smattering of bank stocks are currently being recommended by analysts, who are spending more time turning out sell recommendations because of potential negative news and earnings that will hit stock prices hard.
For example, Erensel recommends shares of Norwest Corp. Yet he recently recommended the sale of the shares of Citicorp, First Chicago Corp., Chemical Banking Corp., First Interstate Bancorp, PNC Financial and Mellon Bank Corp.
Some Rosenberg favorites are Banc One Corp., First Alabama Bancshares and Old Kent Financial among banks and HomeFed Corp. among savings and loans. But, as he was being interviewed, he removed SunTrust Banks and First Union Corp. from his recommended list.
From a list of 20 banks he follows, Mandle's picks include NCNB Corp., Barnett Banks Inc. and J.P. Morgan. Bove is most bullish of all, finding the bank stocks quite inexpensive, his favorites being Chemical Banking Corp., First Chicago and Continental Bank.