Bank One's Troubles Sink Entire Bank Stock Sector

Wednesday, with the Standard & Poor's bank stock index dropping 2.7%.

The Nasdaq bank index dropped 0.47%, but the Dow Jones industrial average rose almost 0.4%, and the S&P 500 index 1.3%.

Most analysts attributed the bank-stock rout to Bank One's announcement late Tuesday that its earnings would fail to meet expectations, and to the 23% decline in its shares on Wednesday. But some attributed the industry's decline to a reaction to the Federal Reserve's increase in interest rates on Tuesday.

"Wacky things happen around the time of a Fed tightening," said Nancy Bush, a banking analyst with Ryan, Beck & Co. in Livingston, N.J. "People fear further tightening."

Most other analysts focused on Chicago's Bank One, which "has sent shock waves across the entire industry," said Marni Pont O'Doherty, a banking analyst with Keefe, Bruyette & Woods.

"It raises all sorts of questions, including whether you can trust bank managements," Ms. O'Doherty said. Bank stocks do not go up up "when people are nervous. This is affecting stocks across the board."

David Trone, a banking analyst with Credit Suisse First Boston, said $256 billion-asset Bank One "is making people rethink the fundamentals of banking."

"Going forward, concerns about efficiency, margins and increased competition will put pressure on earnings," Mr. Trone said.

In St. Louis, A.G. Edwards & Sons downgraded most regional banks "We find bank valuations may not be as compelling as conventional wisdom holds," said analysts David Stumpf, Timothy Willi, and Diana Yates in a note to their clients.

"Already, many regional banks seem unable to sustain double-digit growth in core earnings," the analysts said. "Now that credit quality is showing signs of weakness, it could get even harder."

The analysts downgraded shares of a number of banking companies, including $256 billion-asset Bank One; $11.1 billion-asset Commerce Bancshares of Kansas City; $6 billion-asset Community First Bankshares of Fargo, N.D.; $9.5 billion-asset First Merit Corp. of Akron, Ohio; $22.1 billion-asset First Security Corp. of Salt Lake City; $1.5 billion-asset Mississippi Valley Bancshares of St. Louis; $39.8 billion-asset Regions Financial of Montgomery, Ala.; $40.1 billion-asset SouthTrust Corp. of Birmingham., Ala.; and $17.6 billion-asset Zions Bancorp. of Salt Lake City.

Among the analysts' concerns are falling premiums for banks being acquired. Expected large premiums bolstered the prices of regional banks that were seen as potential takeover candidates. Lower premiums depress stock prices.

Also, regional bank stocks offer investors less liquidity than the largest banks, the analysts said. The bigger the bank, the more shares outstanding, making it easier to move in and out of positions without affecting the market price.

"These and other issues could weigh heavily on bank valuations for a while," the analysts said. "Continued underperformance is a real risk."

A.G Edwards said it will now focus only on "true growth stories" among banks and select names where a case can be made for expansion in price-earnings ratios.

Shares of mortgage.com bucked the trend, rising $7.1875, or 87.8%, to $15.375. Analysts cited takeover speculation about the Plantation, Fla., company, which makes and services mortgages over the Internet.

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