NEW YORK — Financial stocks tumbled Monday amid concerns about whether their valuations have gotten too high, while a World Bank projection further damped hopes.
"While a modest rally following nationalization fears was warranted, we worry that bank stocks got ahead of true fundamentals, especially since the commercial and commercial real estate phases of the credit cycle are in their early stages," Stifel Nicolaus analysts told clients in a Monday note.
The World Bank forecast — which said gross domestic product in developing countries will grow just 1.2% this year, far below 2007's 8.1% jump and last year's 5.9% gain — "didn't help either," Stifel's Anthony Davis told Dow Jones Newswires. He called the report the "worry du jour" for the bank sector.
The KBW Bank Index fell 4.6% in recent trading, while the KBW Regional Banking Index slid 3.3%. Insurance stocks were also lower, as bank stocks tend to drag the life insurance sector down with them due to life insurers' high exposure to the bank sector. The Dow Jones U.S. Life Insurance Index was down 5.2% recently.
"The bank stocks are certainly the canaries in the coal mine of the market these days," Motley Fool analyst James Early said in an interview.
Among the worst performers in the banking sector was regional bank Huntington Bancshares Inc., which dropped 10% to $4.07. Davis — noting the shares have quadrupled from their Feb. 20 low of just $1 — said the stock is "just giving some of that back." The other large bank decliners were also regional banks, including Colonial BancGroup Inc., which fell 9.8%, KeyCorp, down 8.7%, and Synovus Financial Corp., which declined 8.6%.
Davis said investors are more fearful about what's to come from the regional banks, largely due to the fact that they didn't undergo the government's stress tests. He added that most regional banks have larger exposures to commercial real estate and tend to have a larger proportion of their assets in loans.
Among the bigger banks, Bank of America Corp. tumbled 6.7%, while Wells Fargo & Co. slid 4.4%, JPMorgan Chase & Co. declined 4.1% and Citigroup Inc. dropped 4.7%.
Fox-Pitt analysts told clients in a note Monday that technical pressure could be ahead for Citi following its planned conversion of public preferred shares to common shares. The firm warned that following the delivery of the common shares, expected around July 30, Citi's stock could drop to $2.50 or lower amid forced sell-offs by some publicly held preferred holders as well as short pressure that could be driven by the unwinding of hedge and arbitrage trades.
Citi did not immediately respond to a request for comment.
As for the World Bank report, analysts characterized the forecast as the latest bad news for the bank sector at a time when investors are looking for bits of hope to grab onto.
Early said the market considers the World Bank report an especially important one, largely because "it's from a trusted source, and less biased than from a brokerage house. That's something."
Early added, "Nobody wants to be holding a bank if things go sour. A lot of portfolio managers are in risk aversion mode right now."
