Bank shares fell sharply late Wednesday in step with the overall stock market.

A disappointing auction of seven-year U.S. Treasury notes increased yields in the bond market and spurred investors to move capital out of stocks and into bonds.

The Federal Reserve's inaction on lowering short-term interest rates to stimulate the economy also exerted pressure on the stock market.

The Dow Jones industrial average fell 25.94 points, to 3,152.25.

Wells Fargo & Co. showed the biggest drop among large banks, falling $2 to $62.25. Analysts say Wells, with heavy exposure to California's depressed real estate market, always responds quickly to shifting market trends.

Losers and Gainers

Heavy trading continued in shares of Citicorp, which earlier in the week announced the resignation of its president, Richard Braddock. It was the most active stock on the New York Stock Exchange, down 12.5 cents to $14.625 with about 2.6 million shares changing hands.

Other losers included BankAmerica Corp., down 50 cents to $42.25; NationsBank Corp., down 62.5 cents to $42.375; and Bank of New York Co., off 62.5 cents to $43.875.

One of the few gainers was First Chicago Corp., which has been down sharply since shortly after the bank announced an ambitious program to sell about half of its commercial real estate portfolio.

In late trading, the stock was up 25 cents to $30.75. The stock had been up as much as 62.5 cents earlier.

First Chicago shares initially rose after the bank announced the real estate program on Sept. 14. They quickly faltered, however, and now sit about 5% below the peak they hit on the announcement.

Mixed Reviews

The bank's plan for selling $2.1 billion of underperforming real estate loans and foreclosed property has come under intense scrutiny from industry watchers, who think it could serve as a model for other banks. But reviews have been mixed.

Kenneth R. Puglisi of Chicago Corp. raised his rating on the stock to buy from hold, noting that the $625 million special provision being taken by the bank for anticipated losses on the assets being sold was "smaller than we had feared."

Mr. Puglisi said he was "relieved that a good bank/bad bank type of restructuring, which usually requires the participation of large investors who receive extremely attractive rates of return at the expense of existing shareholders, was not deemed appropriate."

Money-center Multiples

But Lawrence W. Cohn of PaineWebber Inc. has stayed neutral on the stock, saying the problem for investors is that "even after it disposes of these assets, First Chicago is still overwhelmingly a money-center bank" and is "going to carry a money center bank [price to earnings] multiple for a long time."

Mr. Cohn said he expects money-center banks to sell at half the market multiple on normalized earnings. He estimates the market multiple at 16, making the money-center multiple eight times earnings.

Based on the analyst's estimated earnings of $4.50 per share for First Chicago next year, the stock should thus sell around $36. From its current price level, Mr. Cohn "does not see enough upside to justify buying the stock."

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