New York -- Bank stocks retreated Tuesday, initially driven down by concern about potential problems at California's large banks.

Wells Fargo & Co. fell $3.375, to $80.625. BankAmerica Corp., which was off as much as $2, ended the day down 87.5 cents, to $46.50. First Interstate Bancorp, with most of its assets outside California, fell more moderately, sliding 62.5 cents to $39.625.

But the decline spread beyond the California banks amid warnings about commercial real estate and the possibility of a rise in short-term interest rates. NationsBank Corp. dropped by $1, to $47; J.P. Morgan & Co. declined $1.75, to $55.375; and Chemical Banking Corp. was off $1.25 to $36.

Noting that bank stock prices were due for a correction, analysts said investors may have overreacted to reports in USA Today and The Wall Street Journal Tuesday. USA Today, in its annual survey of banking reported an increase in problem loans in California last year. The Journal, quoting a study by Standard & Poor's Corp., predicted further real estate losses for banks.

"There's no question that while most of the rest of the country's banks have stabilized and entered recovery, that hasn't happened in California," said Lawrence W. Cohn, bank analyst at Paine Webber Inc.

Judah Kraushaar, analyst at Merrill Lynch & Co., said the selloff may also reflect fear that short-term interest rates may begin to rise soon, potentially squeezing net interest margins.

Part of General Decline

A decline in the overall stock market also dragged down banking issues. The Dow Jones industrial average declined 22.56 points to 3,364.21 amid concerns about rising oil prices.

Citicorp, Meanwhile, shrugged off bad news, declining only 37.5 cents to $18.625. USA Today added Citibank to its list of 375 troubled banks. In addition, Citicorp was reported to have an exposure to Mountleigh PLC, a British developer that was placed in a receivership with $722 million of bank debt.

Bankers Trust New York Corp., also rumored to have an exposure to Mountleigh, declined $1, to $58.375.

Neither bank would provide details of their exposures to Mountleigh.

Despite Tuesday's selloff, Mr. Cohn recommends Bank-America because of expected efficiencies from its merger with Security Pacific Corp. Mr. Cohn acknowledged that Security Pacific had a weak portfolio, but said the merger will enable BankAmerica to amortize losses on Security's real estate portfolio, rather than have to write them off in one block. BankAmerica's own portfolio is not a severe problem, he said.

Wells Strong at the Core

He said Wells has a huge exposure to real estate, but its core profitability is strong enough to overshadow losses. In the first quarter, for instance, Wells was able to report a 15% return on equity, despite adding to reserves for real estate.

"Our view is that California is not New England," Mr. Cohn said. He added that, in contrast to banks in Texas or New England, Wells has benefited from "an absence of crazy thrifts," bidding up deposit rates. The spread between consumer deposit rates and yields on loans at Wells is unusually large, he said, "and even rising rates isn't going to change that."

George Salem, an analyst at Prudential Securities Inc., has been predicting problems for California banks for the past three years. He has "sell" recommendations on Wells and Bank-America, predicting that each will decline at least 20% by yearend.

California bank stocks "have had quite a run," he said. "I've been mystified."

Cary H. Thompson, a vice president at Oppenheimer & Co.'s Los Angeles office, said smaller California bank stocks have remained flat while more liquid shares in the larger banks ran up in price.

Silicon Valley Banshares, San Jose, was unchanged at $11; Union Bank, Los Angeles, lost 25 cents to $23; and Pacific Bancorp, Fresno, was unchanged at $4.50 with no shares traded.

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