Financial stocks' recent decline continued Tuesday as companies began to release third-quarter earnings.
The credit quality of big commercial banks, especially those based in the Southeast, had analysts worried. Share prices of three North Carolina companies - Bank of America Corp., First Union Corp., and Wachovia Corp. - and Detroit-based Comerica Inc. all fell after SunTrust Banks Inc., the first banking company to release earnings, reported a steep rise in nonperforming assets. While SunTrust's earnings were in line with analysts' expectations, the Atlanta company's nonperforming assets rose 32%, to $404.5 million.
Nancy A. Bush, an analyst with Prudential Securities, said that after seeing SunTrust's numbers, the market is concerned that credit quality will be a bigger earnings-season issue than anticipated.
Chip Dickson, an analyst with Lehman Brothers, said, "There has been almost an immediate negative reaction."
Many banks are experiencing at least some credit quality issues. Figures released Tuesday by regulators show that, spurred by a credit decline in the health-care industry, the volume of poorly rated syndicated loans grew for the second straight year.
However, while analysts agreed that SunTrust's growth in nonperforming assets was not good news, they were divided on the impact it will have on other bank stocks.
"I don't think SunTrust is enough of a bellwether to move the entire group," said Thomas F. Theurkauf, of Keefe, Bruyette & Woods Inc. "The whole market is being affected now by this tension between the improving rate backdrop versus the deterioration of the credit side. On good days the rate bulls prevail; on bad days the credit bears prevail."
Denis LaPlante of Fox-Pitt, Kelton said, "We're having a systemic deterioration in credit, the biggest source of which is in leveraged transactions." He added that credit quality has been deteriorating since June of 1998, and said he expects banks' nonperforming assets to continue to rise 5% to 10% for "the next couple of quarters."
Catherine Murray of J.P. Morgan Securities attributed Tuesday's drop in part to profit-taking ahead of earnings releases. "Remembering that banks have had a very nice run from early August through late September, you have some downside risk, so you'll take your profits ahead of the earnings releases," she said.
"In general we were expecting some incremental deterioration in credit quality, particularly in higher nonperforming assets, in this quarter, so SunTrust is consistent with expectations for the group as a whole," she said.
Mr. Dickson said it also appeared that the market remained concerned that a lower-than-expected unemployment rate, announced Friday, had intensified pressure on the Federal Reserve to continue tightening monetary policy. "You're never really sure how long it takes these things to fizzle," he said.
The recent decline in the Nasdaq may have stoked fears that revenue growth is slowing and that earnings growth will falter in turn, Mr. Dickson said.
SunTrust fell 2.52% Tuesday, to $45.9375; Comerica 5.51%, to $53.5625; First Union 3.39%, to $30.25; Bank of America 3.46%, to $48.8125; and Wachovia 0.57%, to $54.1875.