Shares of the largest commercial banks continued to slide Wednesday, largely over concerns about asset quality.
The Shared National Credit Exam results released Tuesday indicated a deterioration in commercial lending that analysts said is bound to affect third-quarter profits at big lending institutions. The exam showed a decrease in asset quality in several industries, forcing banking companies to classify more of their exposure to those loans as nonperforming. Henry Dickson, an analyst at Lehman Brothers, said concerns about revenue growth have only been worsened by early third-quarter results from financial institutions, for example, SunTrust Banks Inc. of Atlanta, which disclosed a higher-than-expected level of nonperforming assets.
You have the banking industry concerns to begin with, and a really weak market, and that means weaker revenue and earnings growth, Mr. Dickson said. Big commercial lenders are suffering because everyone is worried.
Shares of other commercial lenders got caught in the downdraft. Detroit-based Comerica Inc. dropped 0.9%, to $53.1875 a share, and Winston-Salem, N.C.-based Wachovia Corp. fell 3.8%, to $52.
Ross Demmerle, an analyst at Hilliard-Lyons of Louisville, Ky., said that after SunTrust reported its earnings investors appeared to want to sell financials rather than be caught holding one that might produce disappointing earnings when the bulk of reports come out next week.
Investors arent waiting to be surprised, so they are bailing out now, Mr. Demmerle said. This could, in fact, end up being a good time to buy. When earnings come out, the better managed companies are going to shine.
In general, market watchers appear to be heeding forecasts of weaker corporate earnings growth through next year. The Nasdaq fell 2.2%, to 3,168.43, and the Dow Jones Industrial Average was down 1.1%, at 10,413.79. The American Banker index of the top 50 banks closed down 3%, to 740.3, and its index of 225 banks was down 1.1%, to 343.6.
Emerging-market bonds also tripped on Wednesday. Spreads widened by 10 basis points, to 694 basis points over Treasury securities, according to J.P. Morgans emerging market bond index plus.
The coincidental slides of financial stocks, bonds, and the overall market worried analysts.
Wells Fargo chief economist Sung Won Sohn said financials would continue to slide until Wall Street remembers that asset quality is only one factor in the mix.
Most people on Wall Street dont understand the dynamics of the banking system, Mr. Sohn said. As much as 50% of bank earnings are coming from fee-based income. Bank balance sheets are not all that affected by changes in interest rates.
Several banking companies reported earnings on Wednesday. Centura Banks Inc. shares edged down 0.4%, to $34.375, after it reported third-quarter earnings of $34 million, or 85 cents per diluted share, matching Wall Streets expectations. Centura also said it expects to match estimates in the fourth quarter.
Greater Bay Bancorp shares were up 1.5%, to $64.5625, after the company reported that third-quarter earnings rose 2.5% from the year earlier. Earnings per diluted share dipped to 58 cents from 61 cents, however.