Bank stocks fall once again

Volatile bank stocks fail to hold on to earlier gains as enthusiasm over emergency rate cut fades in late day selloff.

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By Aaron Smith, CNNMoney.com staff writer

What will it take to get global markets back on track?
  • A bigger, coordinated rate cut by central banks
  • Regulatory changes
  • Another stimulus package
  • Time

NEW YORK (CNNMoney.com) -- Most bank stocks finished lower Wednesday after trading all over the map following the Federal Reserve's emergency half-point interest rate cut.

It appeared earlier Wednesday that bank stocks might finally buck their losing streak. Veteran banking analyst Richard Bove of Ladenburg Thalmann said in the middle of the afternoon that it looked like banks were headed for a "relief rally" after heavy losses in the past few days

But shares of most banks fell in the last half hour of trading along with the broader market as enthusiasm about the rate cuts by the Fed and other central banks began to fade. The S&P Bank Index finished the day down 1.2%

Bank of America (BAC, Fortune 500) fell 7% as investors continued to show concerns about the company's $10 billion stock issuance and dividend cut.

Bank of America released worse-than-expected third quarter earnings on Monday. The bank, based in Charlotte, N.C., said its profit fell 68% to $1.18 billion, or 15 cents per share.

Bank of America, which released its earnings two weeks early, alarmed investors by halving its quarterly dividend and announcing plans to raise $10 billion through the sale of common stock.

"I think the reason why Bank of America has responded so negatively is that their management had not flagged in advance the weakness in results," said Richard Staite, banking analyst for Atlantic Equities in London.

"In contrast, JPMorgan has already told us that their results will be weak," said Staite. "JPMorgan has painted a pretty cautious picture for the last few months."

Sean Ryan, banking analyst for Sterne, Agee & Leach, said that investors were unhappy with Bank of America for only getting $22 a share through its stock sale. That's lower than the stock's closing price of $23.77 on Tuesday.

"I think people viewed it as a negative surprise that they had to go to $22 to get it done," said Ryan. "If Bank of America has to be that aggressive in getting equity ... that's sort of ominous for banks that are on shakier ground."

JPMorgan Chase (JPM, Fortune 500) finished the day flat even as other bank stocks fell. Staite of Atlantic Equities said that JPMorgan's dividend is "safe," in part because the bank has a strong capital position.

Morgan Stanley (MS, Fortune 500) fell 5%, a day after plunging a whopping 25% because of rumors that Japanese bank Mitsubishi UFJ (MTU) could drop its plans to buy a big stake of the firm.

Morgan Stanley and Mitsubishi UFJ both issued statements saying the pull-out rumor was untrue.

Regional banks were mostly lower. Key Corp. (KEY, Fortune 500) plunged 15%, National City Corp (NCC, Fortune 500). fell 1% and Sovereign Bancorp. (SOV, Fortune 500) dropped 5%. Fifth Third Bancorp. (FITB, Fortune 500) was a notable exception. Its stock rose 8%.

Peter Winter, banking analyst for BMO Capital Markets, said the Federal Reserve's decision to cut interest rates is the prime mover for bank stocks, though different companies react in different ways, which he says explains the volatility.

"Some guys benefit from the Fed cutting, and some guys get hurt by the fed cutting," said Winter.

In other banking news, Wells Fargo and Citigroup, which have been locked in a battle over Wachovia's banking assets, said they had agreed - in consultation with the Federal Reserve - to extend their standstill on further legal actions until Friday morning.

Wells Fargo (WFC, Fortune 500) was up 4%, while Citigroup (C, Fortune 500) fell 5%.Wachovia (WB, Fortune 500) dropped nearly 4%. To top of page

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