As banks take a battering, so do their stocks

It's anxious times we live in.

A rumor circulated through Wall Street on Thursday that Dome Petroleum, a company with debts of $6.2 billion, was unable to meet the interest and principal payments on loans due to Canadian Imperial Bank of Commerce.

Investors, concerned that any problems in Canada might quickly find their way south of the border, emotionally starting selling bank stocks. Securities analysts covering the beleaugered industry were inundated with calls. And investors - in the wake of recent corporate and bank failures - began to get sweaty palms. Last week bank stocks took just about one of the worst beatings in recent years. Jim Wooden, vice-president of Merrill Lynch & Co., commented: ''This was the week that was.''

Even after Dome Petroleum denied the rumors, noting that it had made all the principal and interest payments due on its loans, investors still looked at the banking industry with a great deal of concern. After all, investors were shocked last week to find out that Chicago-based Continental Illinois Bank, the sixth-largest in the nation, was writing off $200 million to $250 million of loans to energy companies. They were part of a $1 billion parcel of loans it had purchased from Penn Square Bank, a small, aggressive Oklahoma City bank, which had closed its doors early in the week.

The ripple effect from the Penn Square affair even spread as far as the Federal Reserve Board, which on Thursday appeared to be a lot more ready to help ease some concerns in the credit markets arising from the Penn Square affair.

Continental Illinois was not the only bank to fall under the Penn Square cloud. Others with exposure related to loans purchased from the Oklahoma bank included Seafirst, in Seattle, and Northern Trust, in Chicago.

Stock in other large money-center banks, such as Chase Manhattan, which is still smarting from its $160 million in losses associated with the failure of Drysdale Securities, and Citicorp have also been sold off by investors in the general rush to avoid bank stocks. Chase's stock has plunged from a yearly high of $60 a share to a recent price of $36 a share, and Citicorp's stock has fallen from $29 a share to $23. Continental Illinois's stock has dropped from $40 to $ 18.

Even Bank of America, the nation's largest, has seen its share price plummet from a yearly high of 241/8 to a more recent price of $17.

The collapse of the bank stocks is not just related to problems at Penn Square. Rather, as Mr. Wooden of Merrill Lynch notes, banks have seen many of their customers' credit ratings disintegrate in the long recession. And the problems have been in multiple markets, not just one depressed sector. For example, he says Bank of America has credit problems in more than one of its markets. The bank has large loans to Argentina, Poland, International Harvester, and California real estate investors.

With such problems affecting their profits now out in the open for most banks , some investors have begun to ask if it is time to start buying the bank stocks. Mr. Wooden says he remains cautious, since he believes the market has yet to reach a major bottom. In a recent research report, James G. Ehlen Jr., an analyst at Goldman Sachs, says it is too late to sell and too early to buy. But, he adds, ''Now is not the time to ignore the group but rather to take stock of the problems facing banks and to quantify the potential impact of each concern on specific institutions' earnings.'' Standard & Poor's on Friday did just that, announcing it had lowered the ratings on Continental Illinois' senior debt from AAA to AA, Seafirst Corp.'s senior debt from AA to A, and Michigan National Corp.'s commercial paper from A2 to A3. It reaffirmed its AAA rating of Chase Manhattan Bank and its A1+ rating of Northern Trust's commercial paper.

In his report, published two weeks ago, Mr. Ehlen suggested that ''for those with truly a long-term horizon and a willingness to endure the continuing onslaught of unquantified exposures to publicized problem credits, purchases at current prices may turn out to be at the lows of this cycle.'' Since then, prices have dropped.

With all the publicity about problems at the banks, some of the money market funds are turning cautious about investing in bank certificates of deposit and commercial paper. At the giant Merrill Lynch Ready Asset money market fund, with assets of $22.6 billion, some 45 percent of the fund's assets are now invested in government securities. In March the fund had 37 percent of its assets invested in government securities. Analysts agree that should the money market mutual funds, with some $200 billion in assets, start to back off from lending to the banks, the banking system would have further problems. ''The money market funds are the key,'' Mr. Wooden says.

Monte Gordon, director of research at the Dreyfus Corporation, a mutual fund, points out that such scenarios highlight ''the sensitivity and unease'' in the markets. ''The rumors are like a fire running through dry brush,'' he comments.

With all their publicized problems this year, banks will be under some pressure to tighten standards, Gordon says. ''Banks will become a lot more quality oriented, and a lot of borrowers will be cut off.''

The stock market tried to rebound some last week as investors hunted for bargains amid some signs the Federal Reserve Board might ease up a bit on credit. For the holiday-shortened week, the Dow Jones industrial average bounced back 17.13 points, closing the week at 814.12.