The rally in bank stocks collapsed Tuesday amid renewed worries that credit card losses will damage earnings and fresh fears about higher interest rates.
Investors rushed to sell and preserve their profits after a week of strong gains by the banks. The Standard & Poor's bank index fell 1.3% after hitting a record high one day earlier. Other market barometers were mostly unchanged.
"The stocks have been unbelievably strong for the past week, so any rumors about rates going up or the economy not slowing quickly enough brings out the profit takers," said Carole S. Berger, banking analyst at Salomon Brothers Inc.
Indeed, the banks had enjoyed an impressive run during the second half of the summer. "Our regional bank universe was up 11% or 12% while the market was up around 5%," noted Anthony R. Davis, bank analyst at Dean Witter Reynolds Inc.
Worries about consumer debt were revived when a New Orleans bank told analysts its third-quarter earnings could be below expectations because of a rise in credit card losses. First Commerce Corp.'s stock plummeted $2.375 to $33.625, and prices of several credit card-related stocks were dragged down as well.
First Chicago NBD was off $1.50 to $43 and First USA Corp. was off $1 to $53.875. MBNA Corp. was off 37.5 cents to $33.375.
Shares of Bank of New York Co., which jarred investors earlier in the year with a reserve-building announcement because of card loans, fell 50 cents to $29.625.
"The cloud of consumer credit quality, bankruptcies, and credit card losses continues to hang over us," said Mr. Davis. "There are recurring concerns about these issues. It's like a bad cold that won't go away."
First Commerce said it expects to earn 71 cents to 73 cents per share after writing off $5.5 million in bad card loans for the third quarter, compared to $4.9 million in the previous quarter.
More important to Wall Street, First Commerce said it plans to provide from $12 million to $14 million against future losses, up from its prior quarterly provisions of $4 million to $6 million.
Some analysts have long been worried that "catch-up provisioning" to rebuild banks' loan-loss reserves - after several years of smaller-than- usual additions to these reserves - will dampen the earnings prospects for the sector and thus hurt stock performance.
The apparent catalyst for renewed rate fears was a news report by Reuters news service that a majority of presidents of the regional Federal Reserve banks favor a rate increase when the Fed's monetary policy committee meets next Tuesday.
Only five of the 12 regional Fed presidents are voting members of the Federal Open Market Committee, which also includes the seven Fed governors. But views from all regionals are weighed as part of the group's deliberations.
The report deepened price declines in the bond market. Bond traders were shaken earlier by a report that industrial production increased 0.5% in August. It was the fifth consecutive monthly increase and exceeded economists expectations of an 0.3% rise.
"What's bad for bonds is bad for banks. The banks follow the bonds down in an environment like this," said Ms. Berger.
Both banks and bonds had rallied over the previous few days on the basis of signs of a decelerating economy that investors assumed would provide the Fed a reason to leave rates unchanged.
Bucking the general downdraft in banks was First of America Bank Corp., Kalamazoo, Mich. Its shares were up 87.5 cents to $52.25 on heavier than normal trading volume.