Bank stocks were dragged down by investor concerns about the financial sector, particularly Bank of America Corp.'s plea for more government funding and the possible breakup of Citigroup Inc.
The KBW Bank Index fell 8.04%, led by a 18.4% decline by B of A — which at one point in the day dropped to its lowest level in 17 years — and a 15.5% drop by Citi.
According to news reports, B of A is close to receiving billions of additional government funds, because of larger-than-expected losses by Merrill Lynch & Co. Inc., which the Charlotte company bought Jan. 1. It has already received $25 billion from the Treasury Department's Capital Purchase Program.
Late Thursday afternoon CNBC reported that government officials were considering giving B of A a guarantee of $100 billion to $200 billion to help back the Merrill acquisition.
Investors are also bracing for more bad news from Citi. On Friday the New York company is expected to report a massive loss for the fourth quarter and plans to divest a number of operations, including its CitiFinancial, Primerica, and private-label card businesses. On Tuesday, Citi agreed to spin off Smith Barney as a joint venture with Morgan Stanley, keeping a 49% stake.
"Bank of America and Citi are the headline news that are dragging down all financials to levels where they are going to test last year's 52-week lows" for bank stocks, said Joseph C. Morrissey, a managing director of bank and thrift stocks at Boenning & Scattergood Inc. in West Conshohocken, Pa.
The broader markets fell early but recovered in the afternoon to close in positive territory. The Dow Jones industrial average rose 0.15%, and the Standard & Poor's 500 rose 0.13%.
JPMorgan Chase & Co.'s stock dropped sharply after the CNBC report on B of A; traders said the report likely spooked investors about bank stocks in general. The stock fell 6.1% for the day.
Before the market opened the New York company said its fourth-quarter earnings rose 33.2% from the third quarter but fell 76.6% from a year earlier, to $702 million. It cited a number of special items, including a $1.3 billion gain from updated accounting for the purchase of Washington Mutual Inc.'s banking operation, $853 million of hedging gains on mortgage servicing rights, and a $627 million gain from dissolving a joint venture.
(JPMorgan Chase said the fair value of the nonfinancial assets acquired from Wamu exceeded the purchase price. The company would not comment further.) Though it cited a gain of 7 cents a share, many analysts said that excluding one-time gains, it lost 25 cents or more.
Frank Barkocy, the director of research at Mendon Capital Advisors Corp., said that JPMorgan Chase's results will look even better in comparison with what other banking companies will report over the next two weeks, "and so I look for the stock to bounce a little bit from here."”
Marshall & Ilsley Corp. fell 26%. After posting a fourth-quarter loss of $403.9 million, or $1.55 a share, the Milwaukee company said it would cut 830 jobs, or 8% of its work force, cancel 2008 executive bonuses, and slash its dividend by 31 cents, to a penny a share.
Loan losses rose 261% from a year earlier and 448% from the third quarter, to $850 million. Chargeoffs rose 263% from a year earlier and 359% from the third quarter, to $679.8 million.
Analysts on average had forecast a profit of 7 cents a share, according to Thomson Reuters.
"This significant shortfall contributed to the further pressure on the group, because investors are likely saying, 'My God, if this bank has problems, how much is this going to be reflected in other institutions with similar exposures?' " Mr. Barkocy said.
Other decliners Thursday included Wells Fargo & Co., which fell 12.6%; U.S. Bancorp, which fell 9.7%; Regions Financial Corp., which fell 11%; SunTrust Banks Inc., which fell 9.7%; and Fifth Third Bancorp, which fell 14.2%.
New York Community Bancorp Inc. rose 5.5%. According to a Dow Jones report, Anthony Polini, a Raymond James Financial Inc. analyst, said the $32.1 billion-asset Westbury, N.Y., company stood out among bank stocks, "because it's actually going to show improved growth and higher earnings at a time when everyone else is fighting for survival."
"Here's a company's that's finally going to be hitting on all eight cylinders rather than digging a deeper trench to hide in," he said.