Bank stocks fell Tuesday, dragged down by the tech-rich Nasdaq composite index, which this week extended it free-fall with its steepest two-day slide since 1987.
Until Tuesday, bank stocks had been beneficiaries of a rotation out of technology stocks. But Tuesday's near collapse of the Nasdaq spread its damage throughout the market in the afternoon trading.
American Banker's index of the 50 largest banks fell 2.58%, while its index of 225 banks fell 2.20%.
"The correction in the Nasdaq made some people in the market believe that this could be a broader issue," said Andrew Collins, an analyst at ING Barings. "Most bank stocks were able to stave off losses because their revenue stream is more diversified."
Banks with the biggest losses were those that have strong venture capital and investment operations, Mr. Collins said. (See related article on page 1.)
Shares of Citigroup Inc. fell $3, or 4.84%, to $59; Chase Manhattan Corp. $5.50, or 5.98%, to $86.50; and J.P. Morgan & Co. $5.6875, or 4.01%, to $136.0625.
Brokerage stocks took a pounding as investors worried about market-sensitive revenues in the second quarter. Merrill, Lynch & Co. fell $7.875, or 7.35%, to $99.25: Lehman Brothers Inc. $10.0625, or 10.10%, to $89.5625; and Morgan Stanley Dean Witter & Co. $6.75, or 7.91%, to $78.625.
Still, many market observers said that the rout in the Nasdaq has set the stage for banks to rebound in coming days as skittish investors reevaluate where to put their money.
"The bloom is off the rose for technology. Investors will start to look for value," said Gerard Cassidy, an analyst at Tucker Anthony Cleary Gull. "The tech wreck is upon us; long live the bank stocks."
At one point during the day, the Nasdaq plummeted 575 points in a frenzied afternoon session. It closed down 74.7 points, or 1.77%, at 4,148.9. The losses pulled down the Dow Jones industrial average, which fell 46 points, or 0.42%, to 11,175.1; and the Standard & Poor's 500 index, down 11.2 points, or 0.74%, to 1,494.77
The downdraft in the composite was set off by the ruling Monday by a federal judge that Microsoft Corp., the Seattle software giant, had violated antitrust laws.
"The Microsoft ruling brought to the forefront that these technology companies are not invincible," said Mr. Cassidy. "Nobody knows what the final outcome of this ruling is going to be, but it has stopped people in their tracks."
The most resistant bank stock in the downturn was Zions Bancorp, which was up as much as 5% during midday trading. The Salt Lake City company said Tuesday that it received government approval on contracts for its subsidiary Digital Signature Trust Co.
But many investors were still cheering the unraveling of Zions' merger deal with hometown rival First Security Corp.
First Security shares were down in Tuesday's market. They had shown some resilience in the preceding few days as investors speculated that the company could attract another suitor, perhaps against its wishes.
"We would guess that there is good buying interest," said R. Jay Tejera, an analyst at Ragen Mackenzie. "First Security is like a bird with a broken wing; eventually someone will come in scoop it up and repair it."
BancWest Corp. of Honolulu, which had been planning to buy some branches from First Security and Zions, is now looking at buying First Security itself, according to sources close to BancWest. A spokesman for BancWest declined to comment.