BANKING

Viewed as safe haven, stocks for small institutions reap solid gains

By Scott Bernard Nelson, Globe Staff, 5/20/2003

Biggest banks Top banks All the charts

ank stocks didn't tear the cover off the ball in 2002, but at least they didn't strike out. Small banks gained 4.5 percent, on average, during the year while their bigger brethren lost an average of 3.9 percent -- both, though, avoided the beating taken by the wider market, as evidenced by the 23 percent drop in the Standard and Poor's 500-stock index.

Investors embraced bank stocks, much as they did in 2001, as a safe haven from the recession-driven bear market. And for the most part, they made the right decision.

With the exception of a handful of syndicated loans gone bad, which was limited to big institutions such as FleetBoston Financial Corp. and Citigroup, banks managed to avoid the problems usually created by recessions. Most importantly, nonperforming loans never rose to worrisome levels and consumer lending activity didn't slow down.

Deposit numbers skyrocketed, too, as jittery investors pulled their money out of the markets and put it in the relative safety of banks.

"The banks have been smoking, at least on a relative basis," industry analyst Gerard Cassidy of RBC Capital Markets said of bank stocks. "The little banks, especially, have just kicked butt."

The good times may have come to an end already in 2003. Corporate borrowing still hasn't picked back up, and investors are worried that, in a turnabout, another Fed rate cut would hurt banks more than it helps.

For the first time in three years, bank stocks are not outdistancing the wider markets. And neither big nor small banks are looking particularly strong in terms of stock price in the months ahead.

"If you think of yourself as a bank stock investor, `caution' is the word to use as we look out at the remainder of 2003 and into 2004," Cassidy said.

Michael Holton, a bank analyst and portfolio manager at T. Rowe Price & Associates, said the good news for investors is that the credit problems that cropped up during the recession appear to be improving this year.

He also said the best places to stash any bank investment cash these days is in the stocks that were most beaten down over the past couple of years.

Holton said Fleet, JP Morgan Chase & Co., US Bancorp, Comerica, Mellon Financial, and Wachovia Corp. are his "safety stocks," because they suffered most during the downturn and because they all stand to benefit from any sustained turnaround in the financial markets.

He also said the takeover speculation surrounding Fleet, Mellon, Comerica, PNC Financial Services Group, KeyCorp, and others is "a sign that people are feeling better about these stocks."

But Robert Gaughen Jr., president of the Hingham Institution for Savings, doesn't think the glory days are gone for smaller, community banks and thrifts. The basic banking trend that dominated over the past two years showed that there is a value to having understandable financial statements, unencumbered by forays into venture capital, investment banking, and stock brokerage businesses.

His company operates five branches along Boston's South Shore. Other top performers in this year's Globe 100 include: Brookline Bancorp, which operates a half-dozen branches under the Brookline Savings Bank name; First Essex Bancorp, with 20 branches; Independent Bank Corp., which operates 52 branches under the Rockland Trust name; Seacoast Financial Services Corp., with 42 branches under the names Compass Bank for Savings and Nantucket Bank; and CCBT Financial Companies, which operates 42 Cape Cod Bank and Trust branches.

Bay State Bancorp, another top performer and operator of a six-branch network under the Bay State Federal Bank moniker, agreed recently to be acquired by Seacoast in a $140 million deal that is expected to close this summer.

"Investors are looking for things they understand and things that pay a pretty good dividend, and the smaller banks offer both," Gaughen said. "I think we'll continue to do just fine this year."

Scott Bernard Nelson can be reached at nelson@globe.com.

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