The market capitalization of the 100 largest banking companies fell 15% in the third quarter as investors retreated from the sector, fearful of higher interest rates and disappointed by earnings reversals at several industry leaders.
Banks were hurt either way they went: Investors were irked at the lack of high-premium mergers but also were wary of aggressive acquirers.
Bank stocks also suffered from what one veteran analyst termed the "redemption phenomenon," in which funds that invest in financial services companies are forced to sell shares to meet the exit demands of clients.
The quarterly American Banker survey showed that Bank One Corp. of Chicago was the biggest loser, plunging 41.5%, to a market value of $40.8 billion on Sept. 30, compared with $69.9 billion three months earlier. Citigroup Inc. of New York, the industry leader in market capitalization, fell 7.2%, to $148.8 billion.
The aggregate market value of the 100 largest banks was $913.3 billion on Sept. 30, down from $1.07 trillion on June 30, for a loss of $163 billion. The top 100 are worth less than they were at yearend 1998.
Market capitalization -- the total value of common stock -- is a barometer of Wall Street's enthusiasm for banks.
It telegraphs investor sentiment about their strategies and management, as well as the risks they are perceived to face in the current business environment.
Shifts in banks' market value are influenced by overall stock market trends. Last year, the top 100 banks plunged a far steeper 23.3% in value during the third quarter amid general fear in world financial markets, but then they recovered considerable ground.
This year's third-quarter performance appears to reflect a significant fall from investor favor for the bank group, for reasons far less obvious than last year's.
"The group continues to be pressured by surprise news of 'blow-ups' at a handful of institutions and interest-rate jitters," analyst Thomas H. Hanley of Warburg Dillon Read in New York told clients last week.
Mr. Hanley observed, though, that credit quality has not been an issue at any of those institutions.
The deep dive in the value of Bank One, a longtime industry leader, was an important factor. The company disclosed Aug. 24 that earnings this year would fall 8% short of projections.
It blamed fierce competition in the credit card business and service problems that prompted customer defections from recently acquired First USA.
That was the same day the Federal Reserve raised short-term interest rates for the second time in three months.
Bank stocks customarily underperform other stocks when interest rates are rising. Moreover, a third rate hike could come as early as tomorrow.
Mr. Hanley said he felt "a great deal" of the pressure on banks has been attributable to outflows from investment funds, which he said may be forcing mutual fund and hedge fund managers to sell shares despite their views of the industry.
Over the past 18 months, capital has been flowing out of financial services mutual funds at a rate of about $200 million to $300 million per month, he said.
A sample group of those funds tracked by TrimTabs.com Investment Research revealed that they have shrunk in value by 31% during that time.
The most recent data showed this category of funds with $17.2 billion of assets.
Mr. Hanley said Van Hedge Fund Advisors International "has estimated that from March 1998 through June 1999 there was a 10% net capital outflow from the 40 financial services hedge funds that operate worldwide."
The analyst said he thinks the fourth quarter will "mark a point at which it may not be worth it for investors to sell any longer," and consequently he predicts a turnaround.
Among the top 25 banking companies, only Amsouth Bancorp. of Birmingham, Ala., managed a gain in market value during the third quarter, up 1.08% to $9.2 billion after adjustment for Friday's acquisition of First American Corp.
But Amsouth, which now ranks 23rd, endured a steep second-quarter drop on investor misgivings about that deal after its announcement.
Otherwise, the best relative performance in the top 25 was by SunTrust Banks Inc. of Atlanta, down 5.3% to a value of $21.1 billion.
SunTrust, which ranks 11th, is generally seen as a conservatively managed bank and a safe haven, although its image was marred last year by the high price it paid to buy Virginia's Crestar Financial Corp.