The Banks Vault

By Daniel Kadlec

So the feeding frenzy for banks finally caught your attention. All it took was the two biggest bank deals ever, within a week of history's biggest deal of any kind--also involving a bank. If you're just now planning to invest around this craze, hello, you're late. Very late. But all good manias last longer than they should, and this one probably will too. If you are not put off by sky-high valuations or a possible turn for the worse in the banking cycle, yes, you may yet crack open the vault with bank stocks.

Understand, though, that the easy money (if there really is such a thing) has already been made. Banks have been buying other banks for decades, and while it hasn't always been a joyride, since their low ebb in 1990 bank stocks have risen nearly twice as fast as the average stock, which itself has risen nearly twice as fast as the historical norm. They've jumped over Standard & Poor's 500 every year since 1994, according to David Berry, research director at Keefe Bruyette & Woods, an investment firm specializing in banks. The outsize gains this decade have left bank stocks looking plenty expensive. Based on estimated 1998 earnings, and relative to the S&P 500, stock prices for 24 major banks that Berry tracks are at their highest levels in 20 years. That leaves them vulnerable to a turn in the economy. And because so much of the stocks' fluff reflects hopes for a takeover, if the pace of bank deals slows for any reason, the stocks could get hit.

Still, the recent mergers of Citicorp with Travelers, NationsBank with BankAmerica, and Bank One with First Chicago show that the push for bigness remains intense. Just about everyone expects a handful of not-quite-ready-for-prime-time banks--Mellon Bank, Wells Fargo, Norwest, Fleet Financial and others--to be bought or to find partners themselves. Meanwhile, those same banks, and many middle-size ones too, sport prices inflated by speculation. Their high stock prices give them currency to shop for smaller prey of their own. Fertile deal territory, for sure.

How do you get involved? You could buy the perceived targets, hoping for a takeover at a fat premium. But if no deal surfaces, you're sunk. Besides, the latest deals have been "mergers of equals," which allow two banks of similar size to hook up without one paying a big premium for the other. Shareholders still get a (more modest) pop, but in both stocks, not just the target's. So you can do well owning the buying bank--say, a NationsBank, First Union or Chase Manhattan. In many cases, that will be the better long-term investment anyway. But I'd also consider simply plunking some money in a well-run regional bank-stock mutual fund like Fidelity's or John Hancock's. Both are up more than 55% in the past 12 months. There are still some 9,100 banks out there. A fund gives you broad exposure to the deal mania that has been lifting the industry for years.

Daniel Kadlec is TIME's Wall Street columnist. Reach him at kadlec@time.com