Fears Of A Slower US Recovery Hit Regional Bank Stocks

The impact of the Japanese natural and nuclear disasters on the world economy damped investors' enthusiasm Tuesday for the stocks of U.S. banks.

Shares of regional banks were falling Tuesday, reflecting a growing concern among investors that demand for new loans may not improve revenue as much as some on Wall Street are hoping. Though some analysts argue that banks' improved capital will still allow them to raise dividends or buy back stock.

The disruptions to the world's third-largest economy, and their potential ripple effect on a U.S. recovery, follow rising oil prices and political upheaval in north Africa and the Middle East. "Anything hurting the U.S. recovery puts pressure on bank stocks," said Peter Winter, an analyst with BMO Capital Markets.

Comerica Inc. (CMA) was among the worst performers in the regional bank group, falling 2.3% in recent trading, to $37.43. The Dallas bank is mainly a commercial lender, a type of lending dependent on growing businesses.

PNC Financial Services Group Inc. (PNC) was off 1.6%, to $61.54; and Zions Bancorporation (ZION) fell 2%, to $22.63; while they are two very different banks, both are thought to be able to derive much of their future revenue from the economic recovery in the U.S.

Midwestern commercial lenders Fifth Third Bancorp (FITB) and KeyCorp (KEY) fell more than 4% before the market opened and were recently down around 2%.

Consumer lenders like Capital One Financial Corp. (COF) and Astoria Financial Corp. (AF) are doing better; Capital One was up 2.6%, to $50.74, after reporting shrinking monthly delinquencies on credit card loans, and Astoria is off 0.4%, to $13.73.

"The fear meter definitely swung hard in one direction" Tuesday morning, said Terry J. McEvoy, an analyst with Oppenheimer & Co. "Investors are taking money off the table until it is clearer what this means for loan growth" and credit quality.

Bankers have said in recent months that demand from businesses for new loans picked up in December, giving investors hope the economic recovery would soon impact bank earnings--one reason why bank stocks rose. The KBW bank index was up more than 6% from January to mid-February, when concerns about the political upheaval in North Africa and the Middle East damped economic growth expectations. On Tuesday, the index fell 1.6%, compared to a 1.7% decline of the Standard & Poor's 500 Index.

But loan demand has remained timid. "Even excluding Japan, it looks that the economic recovery is slower than thought," said Joseph Fenech of Sandler O'Neill & Partners. A slower economic recovery could mean the improvement in delinquent loans will also slow.

In addition, momentum trading moves like the one that hit the market Tuesday morning usually have a big impact on bank stocks. "Regional bank betas are pretty high following the financial crisis," said Frederick Cannon, the chief equity strategist at Keefe, Bruyette & Woods Inc. Beta refers to the tendency for certain stocks to move more or less than the stock market in general; high beta stocks tend to move up and down more than broad market indices.

Large banks are also falling Tuesday, with Citigroup Inc. (C) and Bank of America Corp. (BAC) down 2.5%, and 2.2%, respectively, to $4.42 and $13.92. However, Wells Fargo & Co. (WFC), also a big commercial lender but best known for its retail banking business, was off only 0.7%, to $31.88.

So analysts argue the sell-off in bank stocks, tied simply to a slower--or perhaps even stalled--recovery, is overdone. Banks have sufficient capital to increase their dividends and buy back their shares, and acquisitions will pick up, Fenech said, giving investors reason to continue to invest in banks.

-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; [e-mail]