Foreign intrigue scuttled what might have been a positive day for bank stocks on Friday.

The KBW Bank Index was higher at midday on solid domestic news when the markets were spooked by a report that a South Korean naval ship had sunk near the border with North Korea. Investors turned into sellers and the index finished the day down 0.25%. The Dow Jones industrial average eked out a 0.08% rise and the Standard & Poor's 500 index edged up 0.07%.

Anthony Conroy, the head trader for BNY ConvergEx Group, said the dramatic shift in investor sentiment was important to note. "All the indecision globally is creating nervousness and volatility," he said. However, Conroy said that investors who pull out of the banking sector have "limited" alternatives right now, making it likely that a moderate retreat of 1% to 2% could be recouped once earnings reports start next month.

There was some positive news domestically.

Fitch Ratings said in a release that regulatory reform is likely to reduce risks for the banking industry. Meanwhile, financial stocks seemed to gain steam earlier in the day with reports that the Treasury Department is crafting a strategy for a methodical conversion of Citigroup Inc. warrants to stock.

Also, the Obama administration went public with plans to lower the amount some borrowers owe on mortgages. Under the plan, people who owe more on their homes than the value of the property could get new loans backed by the Federal Housing Administration. The program would be funded by $14 billion from the existing $75 billion foreclosure-prevention program.

Citi shares rose 0.9% despite the broader retreat from financial stocks.

SunTrust Banks Inc. shares fell 0.3% after Fitch cut its long-term issuer default ratings for the company. The credit ratings agency's cut, from A-minus to triple-B-plus, reflected concerns that profitability may evade SunTrust until next year because of "continued credit stress" and corresponding costs.

AmericanWest Bancorp shares fell 4.3% after the Federal Deposit Insurance Corp. disclosed that the company failed to raise funds or sell itself by a mandated deadline, the Puget Sound Business Journal reported on its Web site Friday. AmericanWest's chief executive told the publication that missing the deadline does not mean that "anything imminent will happen."

Other gainers included Bank of America Corp., up 0.9%; Marshall & Ilsley Corp., 1.1%; and Synovus Financial Corp., which rose 0.6%.

Decliners included M&T Bank Corp., down 2%; KeyCorp, 0.9%; and U.S. Bancorp, which fell 0.5%.

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