Financial stocks fell Monday as investors - concerned about earnings for investment banks and commercial banks - took profits on the rally sparked by last week's announcement that UBS AG would buy the PaineWebber Group.
"People are reacting to the UBS-PaineWebber effect," said Lauren Smith, an analyst at Keefe, Bruyette & Woods Inc. 
News of the $10.8 billion deal triggered a rally in brokerage stocks, sending shares of Lehman Brothers and Donaldson, Lufkin & Jenrette shares 5% higher and Morgan Stanley Dean Witter shares 3% higher last Wednesday.
Speculation on who will be the next purchase target lifted prices to the point where investors worried the rally was overdone, Ms. Smith said.
The selloff was especially pronounced for the brokerages.
Lehman Brothers shares gained 19.3% last week, DLJ 16.3%%, and Morgan Stanley Dean Witter 7%. Lehman fell $4.1875, or 3.97% to $111.25 Monday. DLJ was off $2.0625 or 4.09% to $48.3125, and Morgan Stanley Dean Witter was off $3.875, or 4.04% to $92.125.
Some analysts said the setback was not just about profit-taking. "There are two factors here," said R. Jay Tejera, an analyst with Ragen MacKenzie. "Several reports pertaining to asset quality have created a draconian effect on people's expectations about credit quality and nonperforming loans. Also, capital markets' revenue has suffered lately."
Lawrence Cohn, an analyst with Ryan, Beck Southeast Research, said, "Everybody's earnings are lower because of a slowdown in investment banking business."
Bank of America Corp.'s earnings, released Monday, fueled some of these concerns. Though the results met the consensus of analysts surveyed by First Call/Thomson Financial, the report showed stagnation in capital markets activities and a 12% increase in nonperforming loans. The company reported income of $1.23 per share, compared to $1.15 in same quarter last year. But earnings a year earlier included one-time merger-related charges.
Bank of America's shares fell 12.5 cents, or 0.26% to $47.375.
"This 12% increase [in nonperformers] clearly bears some watching," Mr. Tejera said. "It's going to be tough for this stock to outperform next year until bad-loan numbers are down."
The American Banker index of the 50 largest banks fell 1.46%, while its index of 225 banks declined 1.73%.
Decliners included First Boston Financial, off $2.25, or 5.96% to $48.375; Fifth Third Bancorp, $1.8125, or 3.90% to $44.625; and Sun Trust Banks Inc., $1.0625, or 2.22% to $46.75.
Gainers included J.P. Morgan, up $3.3125, or 2.57% to $132; Bank of New York, up $1.4375, or 3.06% to $48.375; and Northern Trust Corp., up $2.125, or 2.90% to $75.50.
