Bank stocks took another beating Thursday as investors continued to unload shares amid uncertainty about banks' earnings prospects.
"Get out your tourniquet," said one analyst, as blood-red numbers flashed across his trading screen, indicating the fourth straight day of severe declines in bank stock prices.
The Standard & Poor's bank index fell 2.1%, while the S&P 500 dropped 0.8%.
Since the new year began, the bank index has dropped 5.7%, while the composite index has given up 2.0%.
It was the worst showing by banks on the stock market in the days prior to earnings in recent memory. Indeed, banks have usually rallied in advance of earnings.
Some analysts said this week's angst is nothing that can't be cured by a positive round of earnings reports. But positive news from the first major bank to report results did nothing to slow the spiral.
SunTrust Banks Inc. reported fourth-quarter earnings up 8.6% from the first quarter of 1997, in line with expectations. (See article, page 4.) But investors sold off the stock anyway, despite upgrades from Bear, Stearns & Co. and Josephthal & Co. The Atlanta bank's shares closed the day at $68.0625, down $1.8125.
Bill Schneider, head of bank stock trading at Salomon Smith Barney, said recent sectorwide downgrades by prominent analysts "totally took the momentum away from the banks.
"Everyone had overweighted the group because it had done so well, and so selling begets selling. It's getting pretty critical that the group stabilize soon," Mr. Schneider said.
Analysts said investors were still worried about the Asian economic crisis, and now have started to fret over a flattening yield curve that calls into question whether banks can earn money on loans.
"A lot of negative factors have come together at the same time," said Scott Edgar, director of research at Sife Trust Fund, Walnut Creek, Calif., who said he has used the selloff to buy a few bank stocks. "People who aren't hard-core bank investors are probably taking their gains now. But in a week people will probably be focusing on how solid bank earnings look compared to other sectors."
Many investors said that momentum investors entered the market late in the year and now are pulling out. "Banks got bid up to excess valuations," said Thomas Lefebrve, portfolio manager at Phoenix Duff & Phelps. "But banks are still compelling overall, especially in the regionals, and this group has outperformed the market over the past month."
Continuing worries about Asia are still hurting bank stocks, particularly at the biggest banks, analysts said, in part because banks haven't provided investors much guidance on how a downturn there could affect lending or trading.
"Banks haven't delineated well what their exposure in Asia really is," said analyst Lawrence W. Cohn at Ryan, Beck & Co.
But he added that there's not much bank managements can do to reassure investors right now, because they are in mandated "quiet periods" just before earnings come out. During these quiet periods banks must also cease buying back their stock. Buybacks can serve as a share price floor when investors sell.
Until banks come out with their earnings and start talking to investors again next week, Mr. Cohn said, "you've got everyone trying to figure out what's real and what's imagined."
The possibility of an extended Asian economic crisis combined with an unusual interest rate environment is particularly worrisome because it creates the possibility for derivatives-related losses unseen since 1994.
Derivatives are confidential contracts tied to changes in interest rates, foreign exchange, or other indexes or assets.
Major trading banks have made tremendous profits tailoring these contracts to the wishes of their corporate customers.
"These contracts have all been written lately when the yield curve sloped one way," observed one analyst. "We'll see what happens on the other side of the curve."