Citicorp led a broad decline in banks stocks Wednesday.

The American Banker index of bank stocks fell 1.9% on the day, compared with a 0.67% decline in the Dow Jones industrial average.

The selloff was fueled in part by rumors that Fidelity Management and Research Corp. had started to unload a portion of its substantial bank stock holdings.

A spokeswoman for the Boston-based money manager denied that her firm was "behind the selling" in Citicorp, whose shares dropped 6% Wednesday. She declined to discuss whether Fidelity was selling other bank stocks.

A 10% Stake in Citicorp

Fidelity is the largest bank stock holder. It has been particularly optimistic about Citicorp's prospect, earlier this year increasing its stake in the nation's largest bank to nearly 10%.

Citicorp shares are down about 10% since the company's announced last Friday that it had signed a memorandum of understanding with regulators and that it had restated its earnings for the second quarter downward by $28 million. The restatement reflected an accounting change for the value of mortgage servicing rights.

The worst of the decline came Wednesday, when Citicorp shares lost $1.125, reaching $16.75. Volume was very heavy, with almost five million shares changing hands, more than double the level of the preceding day.

Concern over Brazil Pact

One factor said to be behind the drop was concern that the Brazilian debt accord with banks may fall apart in light of the country's political turmoil.

The day's other big losers included: BankAmerica Corp., down $1.25 to $49.75; Chemical Banking Corp., off $1.375 to $39.50; NationsBank Corp., down $1.25 to $50; and Chase Manhattan Corp., off $1.50 to $30.375.

A Citicorp spokeman said the company knows of no "undisclosed news" that might explain a decline in the share price.

Analysts said investors are backing away from banks amid signs that the economy is weakening. Especially vulnerable are banks whose share prices have skyrocketed since they began to overcome asset-quality problems last year.

"The momentum players only play while there's still momentum," noted Dick Hurckes, of Loomis, Sayles & Co., a fund manager that recently halved its bank holdings.

Citicorp's recent slide actually started on Aug. 10, the first trading day after it announced a $650 million issue to convertible preferred stock. The stock that day lost 87.5 cents to $18.875 on fears the sale will dilute earnings per share.

The potential dilution was estimated by one analyst at 3% to 6%, assuming a price of $19 and a 9% dividend rate on preferred stock.

"Citi is under incremental pressure for a couple of reasons," one analyst said. "First, there's additional supply coming in the form of the [convertible preferred stock], and the stock is seeking new equilibrium. Second, the stock is under pressure, because a fundamental issue has been brought up with respect to mortgage servicing.

"The thing everybody must sort out is whether this is isolated or a reflection of a company that has been particularly aggressive in its accounting practices," the analysts added.

Asset Quality Problems

Meanwhile, another sign emerged that Citicorp's asset-quality problems are far from over. According to the company's quarterly filing with the Securities and Exchange Commission, nonperforming assets accounted fo 9.5% of loans and other real estate owned in the second quarter, compared with 9.31% in the first quarter and 8.92% in the second quarter of 1991.

To be sure, Citicorp reported a $163 million decline in nonaccruing consumerr and residential mortgage loans to $3.684 billion in the second quarter. But a lot of the reduction was due to a transfer of $149 million in loans from Citicorp's past-due account to its foreclosed property account.

When both foreclosed property and past-due loans are considered, Citicorp's problems consumer loan portfolio continued to rise during the quarter, to now 5.15% of total consumer loans and foreclosed residential properties, up from %.08% at the end of the first quarter.

"Citicorp's approach to reporting has always beens highly individualistic," said Raphael Soifer, an analyst at Brown Brothers Harriman & Co. The bank "generally has a reputation for being conservative in the reporting of credit issues. This is one relatively small, but still significant, chink in that."

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