Bank stocks, boosted by falling oil prices and positive news among regional banks, marched back into the black Tuesday.
The KBW Bank Index closed up 2.9%. It was up more than 3.5% in midday trading, after closing down 0.02% on Friday. The markets were closed Monday in observance of Labor Day.
Strength in financial stocks did not, however, boost the broader markets enough to keep them in positive territory. The Dow Jones industrial average, after gaining strongly in morning trading, closed down 0.2% Tuesday. The Standard & Poor's 500 was off 0.4%.
Oil prices fell more than $7 in intraday trading after Hurricane Gustav appeared to cause far less damage than initially feared to oil facilities on the Gulf Coast.
Declines in oil prices have been directly linked to the performance of financial companies this summer because lower energy costs drain less from consumers' pocketbooks. This, economists said, may promote two positive outcomes: more borrowers with the ability to pay off bank loans, easing the credit crisis, and more money for discretionary spending, a mainstay of the economy.
"You are getting some pretty big reactions, but that's because the oil is a very important factor in the economy," Peter Kretzmer, senior economist at Bank of America Corp., said in an interview Tuesday. "There is such a heightened sensitivity to the possibility of a deep recession that, when oil drops, it has a big impact on the markets."
Several large-cap companies were among the beneficiaries: Wachovia Corp. rose 4.8%; B of A, 4.8%; and SunTrust Banks Inc., 4%.
But oil was not the only headline of the day. Big gainers included Regions Financial Corp., 19.2%; Zions Bancorp, 9.7%; and PacWest Bancorp, 16.7%.
Regions cut its dividend in July and said it might consider raising capital this year, after reporting a steep decline in second-quarter profits.
On Tuesday, however, investors rewarded Regions' decision to work with state and federal regulators Friday to take over the failed Integrity Bank in Alpharetta, Ga., with its $900 million of deposits and five branches. Analysts said the deal indicates that Regions, a Birmingham, Ala., banking company, is generally healthy in regulators' view.
Regions "got an implied stamp of approval," Kevin Fitzsimmons, a Sandler O'Neill & Partners LP analyst, said in an interview Tuesday. "By no means is Regions immune to all that's happening out there … , but if anyone was speculating that some negative bombshell lurks around the corner, I think this arrangement with regulators throws cold water on that."
Mr. Fitzsimmons upgraded his rating on Regions to "hold," from "sell."
Analyst Brent Christ of Fox-Pitt Kelton Cochran Caronia Waller, meanwhile, upgraded Zions to "outperform," from "in-line." He wrote that, though Zions has been bruised by the credit crunch, he expects the Salt Lake City company to emerge from the current credit cycle well-positioned to grow in the West.
"While fundamental challenges are likely to persist for the foreseeable future largely due to elevated credit costs and CDO-related writedowns, we believe they are manageable," Mr. Christ wrote.
PacWest's shares rose Tuesday after the CapGen Financial private-equity firm said it would invest $100 million in the San Diego banking company. PacWest said it plans to use the additional capital to pay down debt and fund growth.
James Abbott, an analyst at Friedman, Billings, Ramsey & Co., reiterated his "outperform" rating on Tuesday, saying the capital injection puts "PacWest squarely in the driver's seat to bid on distressed institutions."