Bank stocks roaring while little guy's savings rates shrink
Bank stocks roaring while little guy's
savings rates shrink
by Robert K. Heady
Bank Rate Monitor
Are
you better off putting your money into bank Money Market and CD accounts,
or investing in some of the bank's stock?
There's
a big argument to go the stock route, based on what's been happening with
bank shares on Wall Street. They haven't been performing quite as well as
the total market, but their returns have been a darn sight better than the
piddling 2.45 percent you earn on an MMA.
Let's
say you plunk down $10,000 to buy stock in one of the five big Money Center
banksJP Morgan, Bankamerica, Chase, Bankers Trust and First Union.
Over
the past 15 monthssince the beginning of 1998, to be exactyour bank stock
portfolio has increased by nearly 17 percent to $11,700, according to the
S&P 500 Index.
Had
you instead invested in S&P's 27 large regional banks, your money would
have grown 11 percent to almost $11,000.
By
contrast, the overall S&P Index (not just banks) gained 28.58 percent
last year, which would have boosted your stock account to $12,858. From
January through mid-March of this year, the S&P 500 Index was up nearly
6 percent, or another $600 in your pocket.
The
outlook for the next year, says David S. Berry, director of research for
Keefe Bruyette & Woods, New York, is for "stronger earnings growth
as banks continue to grow their non-interest revenues."
"Does
that mean, for instance, revenues from higher fees charged to customers?"
I asked Berry. "Bingo!" came his reply.
Of
course, as bank stockholders get rich, that has nothing to do with the paltry
interest you earn on your deposits. The low interest rate climate that banks
are operating in, plus the country's near-zero inflation rate, are what
propel stocks upward. If interest rates were to suddenly jump by, say, one
or two percentage points, Wall Street would go splat and the banks' shareholders
would shudder.
As
it is, the differences between what you're earning on your savings and how
the industry's stocks have been performing are somewhat amazing. For example:
In
1998, the stock of Firststar Corp., Minneapolis, soared by an outstanding
62.09 percent, says S&P. Yet, in the same span, Firststar's yield on
a one-year CD account dropped from 4.15 percent to 4.10 percent.
Also
last year, Chase Manhattan's one-year CD yield plunged from 5.09 percent
to 3.75 percentbut Chase's stock managed to zoom by 29.68 percent.
First
Union, Atlanta, lowered its yield from 5.6 percent to 4.35 percent, while
its stock price climbed by 18.66 percent.
This
year's story has been no differentat least until the global stock market
took a couple of thumps the third week of March, when OPEC oil nations decided
to turn off some of their spigots to raise the price of gasoline. From Jan.
1 through March 23, BankBoston stock rose by 14.13 percent (that's in just
three months, mind you) as its one-year CD held steady at 4.25 percent.
Of
the Money Center banks, Bankamerica was one of the few to boost its one-year
CD yield. It gained from 4.13 percent to 4.24 percent.
If
you're naive enough to expect this imbalanced picture will change in the
near future, you're whistling Dixie. Since the beginning of '98, bank Money
Market Account yields have dipped from 2.60 percent to 2.45 percent, your
interest on checking has fallen to a miserable 0.96 percent, and yields
on five-year CDs have plummeted by almost a full percentage point, according
to bankrate.com's national surveys.
Total
profits for all U.S. banks and thrifts last year increased by 6 percent
to $72.1 billion, up from $68 billion the year before. Bank stock investments
will continue to pay gangbuster returns as long as the industry keeps finding
new ways to hike fees, hold down savings rates and thus add to its bottom
line.
The
thing to remember is that bank stocks, vs. bank savings rates and fees,
operate at opposite ends of the spectrum. When you spot a tiny fine-print
notice in your next monthly statement telling you that an ATM fee is going
up, or that you're going to be hit by a credit card charge, you know what
the result will be:
Louder
cheers on Wall Street.
Editor's Note: Robert K. Heady is the founding publisher of Bank Rate
Monitor and is the co-author of the book, "The Complete Idiot's Guide
To Managing Your Money." You can write to him in care of The Bull &
Bear or send e-mail to jrnl8888@aol.com.
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