Bank shares tumbled for the second straight day on Tuesday amid investors' concerns that a decline in long-term interest rates will hurt bank earnings.
Bank stocks, which are rate-sensitive, usually do well when the bond market is strong. But that has not been the case this week.
A rally in long-term bonds has sent the yield on 30-year Treasury bonds to about 6.30%, their lowest point in 16 years.
"Some investors are concerned about the yield curve flattening," said Robert Bonelli, executive director of the Ernst Financial Group, a unit of Ernst & Co.
The bank stock declines have been occurring amid gains in the overall stock market.
The Dow Jones industrial average and the Nasdaq composite index both set record highs on Tuesday, with the blue-chip index closing at 3,586.98 and the over-the-counter measure at 731.
Leading the way down were shares of First Interstate Bancorp and Wells Fargo & Co. First Interstate fell $2.875 to $60.625 and Wells was off $2.375 to $111.75.
First Union Corp.'s shares fell $1.375 to $43.75. Bankers Trust New York Corp.'s shares fell $1 to $78.37.
SunTrust Banks' sharesdropped 87.5 cents to $43.25. Barnett Banks' shares fell $ 1.3 7 5 to 45.375. Shares of First Fidelity Bancorp. skidded $1.125 to $46.25.
If the yield curve flattens, investors fear, net-interest margins will also tighten, eating into earnings.
Fears Sparked Spring Selloff
This isn't the first time that investors have shown concern about bank margins.
Worries about a flatter yield curve sparked a prolonged selloff last spring that dragged down bank stock prices by an average of 18%.
Back then, investors worried that inflation would cause a rise in short-term rates that would raise banks' cost of funds and erode profits.
The new worry is that the rates banks get on loans and securities will fall while the rates they pay on deposits will stay the same. This combination would put pressure on margins.
The fear of a squeeze on net interest margins is well founded, said Thomas Brown, an analyst at Donaldson, Lufkin & Jenrette Securities Corp. Bank investment securities are repricing faster than their liabilities, he said.
But Mr. Brown and other analysts think that although net interest margins will tighten slightly over the next few quarters, the change may not affect earnings.
Growth in lending, for example, could offset shrinking margins.
"The extend of margin compression will not as bad as people fear," Mr. Brown said.
Analysts and money managers said that the two-day downturn was not the beginning of another prolonged selloff.
'Wouldn't Be Too Panicked'
"This is not a new downleg in bank stocks," said Judah Kraushaar, an analyst with Merrill Lynch & Co. "I wouldn't be too panicked by two days' worth of selloff."
Money managers said that trading volume has been light, an indication that the panic selling that occurred in April and May is not being repeated.
First Fidelity, for example, lost ground on 192,100 shares traded, roughly half its normal daily volume of around 350,000.
When trading volume is that slight, money managers and analysts do not pay much attention to price movement.
"Because of vacations, people aren't around to support price levels of some shares," said Mr. Bonelli.
Indications of Profit Taking
Furthermore, there are indications that some of the selloff represented profit taking and not a rotation out of the sector.
"I don't think we are seeing a rotation out of the sector because then we'd see massive trading volume, like we saw in April and May," Mr. Bonelli said.
Shares of the two big California banks, Wells Fargo and First Interstate, have been among the biggest gainers this year, for example.