Bank stocks rose most of Monday on news from a number of companies that they will use money from the Treasury Department's Capital Purchase Program to make more loans and possibly buy competitors.
However, the stocks ended another volatile trading day slightly in the red.
The KBW Bank Index rose as much as 5% during the day. More than a few of its components announced over the weekend and on Monday that they were selling stakes to the federal government.
"Any kind of shoring up within the financial market — particularly if the money is being put into the proper hands — is going to have a positive reaction in the market," said Joseph C. Morrissey, managing director of bank and thrift stocks at Boenning & Scattergood Inc. of West Conshohocken, Pa.
Like the broader market, bank stocks fell toward the end of the day as investors took back gains in response to continued concerns of a worsening economy. The index closed down 0.54%.
Capital One Financial Corp., which said Monday that it would sell $3.55 billion of preferred stock and warrants to the Treasury, rose for most of the day but closed down 2.6%.
Other companies that announced investments finished in the black. Regions Financial Corp. (which is getting a $3.5 billion investment), rose 11.3%. SunTrust Banks Inc. (which is getting $3.5 billion) rose 0.7%. Fifth Third Bancorp (which is getting $3.4 billion), rose 5%. Comerica Inc. (which is getting $2.25 billion) rose 5.7%, and Huntington Bancshares Inc. (which is getting $1.4 billion), rose 14.6%.
Three of the largest banking companies that have announced huge investments from the government program dropped Monday. Bank of America Corp. fell 2.6%, Citigroup Inc. fell 3.4%, and JPMorgan Chase Co. fell 4%.
The companies receiving government investments said they would use the money for a variety of reasons — making more loans, shoring up capital ratios as the faltering economy strains balance sheets, and possibly buying other banks.
Theodore Kovaleff, a bank and thrift analyst at Granta Capital Group LLC in New York, said one reason the market is reacting positively to the announcements is that weaker companies could be taken out as a result of the program.
"The reason for the federal gravy train is to stimulate loans, but there is a secondary reason, and that is to help with the acquisition of troubled institutions, which takes a lot of pressure off the FDIC," Mr. Kovaleff said.
PNC Financial Services Group Inc. became the first company to use the Capital Purchase Program to fund a deal. The Pittsburgh company said Friday that it would acquire National City Corp. of Cleveland, which is hobbled by bad mortgages, for roughly $5 billion, using $7.7 billion of preferred stock and related warrants under the program to fund the deal. PNC rose for most of the day but closed down 0.4%.
Mr. Kovaleff said another acquirer could be BB&T Corp. The Winston-Salem, N.C., company has been wanting to expand in Florida, and now may be the best time to do that if it uses the $3.1 billion it plans to get from the government's Capital Purchase Program to buy BankUnited Financial Corp. in Coral Gables, Fla., he said.
"If BB&T would have bought BankUnited two or three years ago, they would have been paying somewhere in excess of $30 a share," Mr. Kovaleff said. "But now they would be able to do it at a bargain price."
BB&T rose most of the day but closed down 0.2%. BankUnited fell 7.3%.
In announcing the government investment Monday, John A. Allison, BB&T's chief executive officer, said it would likely use the money to buy other companies.
"Fortunately, our own strong capital position has allowed us to meet the lending needs of our clients, even during this economic downturn," Mr. Allison said. "For us, the additional capital will not only extend and strengthen our lending capacity, but provide other strategic options, as well."
A.C. McGraw, a BB&T spokeswoman, said in an interview Monday that the $137 billion-asset company would not say whether it would buy BankUnited.
The broader market had a mixed day of trading as investors weighed continued global sell-offs against the news from participants in the Treasury program. Stocks got a bounce after the Commerce Department reported that sales of new homes rose 2.7% last month, to a seasonally adjusted annual rate of 464,000. Economists had expected a drop.
But traders said stock volatility was exacerbated by light trading. The Dow Jones industrial average fell 2.42%, and the Standard & Poor's 500 fell 3.18%.
Other decliners included U.S. Bancorp, which fell 2.1%; KeyCorp, which fell 2%; Wells Fargo & Co., which fell 0.3%; Marshall & Ilsley Corp., which fell 4%; State Street Corp, which fell 5.1%; Bank of New York Mellon Corp., which fell 4.7%; Frontier Financial Corp. in Everett, Wash., which fell 6.3%; and Vineyard National Bancorp in Corona, Calif., which fell 11.1%.
The gainers included East West Bancorp, which rose 3.4%, and Zions Bancorp., which rose 7.2%.