Bank stocks fell Wednesday as the first big day of earnings reports showed how increased credit costs hurt third-quarter profits.
The KBW Bank Index fell 7.23%, but broader indexes also sank as economic data sparked fresh fears of a looming recession.
Even with the government's bailout plan and the Federal Reserve Board's moves to stimulate lending, "we still have a nervous quarter to deal with," said Michael O'Boyle, an investment banker at Sterne, Agee & Leach Inc. "It's weak across the board. We're going to see a lot of other-than-temporary impairment charges and mark-to-market, but now is the time to do it."
Gary Townsend, the chief executive of Hill-Townsend Capital LLC, said Wednesday's sell-off also likely reflected the market taking back some gains from the rally earlier in the week. In addition, "it appears as though some hedge fund positions are being liquidated, which contributes to excessive selling pressures."
The Dow Jones industrial average fell 7.87%, and the Standard & Poor's 500 fell 9.03%.
The Commerce Department said Wednesday that retail sales fell 1.2% last month, compared to the 0.7% decline economists had expected.
The Fed reported Wednesday in its Beige Book that economic activity weakened last month across all 12 of its districts, and Fed Chairman Ben Bernanke said in a speech to the Economic Club of New York that a broader economic recovery will not happen right away.
However, the Treasury Department's bailout program, particularly its plan to invest up to $250 million directly in banks, should help stimulate lending, Mr. Bernanke said. "We look to strong institutions to participate in this capital program, because today even strong institutions are reluctant to expand their balance sheets to extend credit. With fresh capital, that constraint will be eased."
JPMorgan Chase & Co. fell 5.5%. Its third-quarter profit fell 84% from a year earlier, to $527 million, or 11 cents a share, but on average analysts polled by Thomson Reuters had forecast a loss of 21 cents a share.
The New York company absorbed $3.6 billion of mortgage-related markdowns and a $642 million loss on Fannie Mae and Freddie Mac preferred securities. It lost $640 million on last month's acquisition of Washington Mutual Inc.'s banking operation.
JPMorgan Chase provision for credit losses more than doubled, to $3.8 billion, from a year earlier.
Wells Fargo & Co. fell 0.5%. The San Francisco company said its profit fell 6.3% from the second quarter and 23% from a year earlier, to $1.64 billion, because of rising credit costs and a previously disclosed loss tied to its investment in Fannie and Freddie preferred stock. Still, its earnings of 49 cents a share managed to beat the average analyst estimate by 8 cents, according to Thomson Reuters, because of better-than-expected loan growth.
Wachovia Corp. fell 3.9%. Regulators approved Wells' deal for the Charlotte company Sunday, after Citigroup Inc. said it would not pursue its earlier, government-assisted deal.
Shares of Citi, which still has a lawsuit pending against Wells and Wachovia, fell 12.8%.
Marshall & Ilsley Corp. fell 7.7%. The $63 billion-asset Milwaukee company said that its third-quarter net income fell 52% from a year earlier, to $83.1 million, because of losses in its construction and development loan portfolio.
Its earnings of 32 cents a share beat the average analyst estimate by 11 cents. Average loans rose 10%, to $50 billion, and M&I reported lower-than-expected credit costs. Its loan-loss provision rose nearly fourfold from a year earlier but dropped 82.5% from the second quarter, to $155 million.
Commerce Bancshares Inc. of Kansas City, Mo., fell 6.5%. The $17 billion-asset company said third-quarter profits declined by 52% from a year earlier, to $26.5 million, because its previously announced repurchase of $530 million of auction-rate securities led to a $33 million noncash loss.
Bank of America Corp. fell 10.2%. Sovereign Bancorp Inc. dropped 11.3%. State Street Corp. fell 17.4%. BB&T Corp. dropped 5.2%, and Fifth Third Bancorp dropped 4.2%.
Hudson City Bancorp Inc. was a bright spot for the bank sector Wednesday. Its shares rose 3.9% after the Paramus, N.J., company reported a 63.8% increase in third-quarter profits from a year earlier, to $121.9 million, or 25 cents a share, which beat the average analyst estimate by a penny, according to Thomson Reuters.
It attributed the profit jump mainly to an 18% increase in total loans from Dec. 31, to $28.52 billion, resulting from a flight to quality by consumers seeking mortgages.
Hudson City's credit quality has held up better than others hit by the housing meltdown. Provisions more than doubled from a year earlier, to $5 million, but net chargeoffs rose to only $1.4 million, from $606,000 in the third quarter of last year. Nonperforming assets rose 22% from the second quarter, to $151.6 million, but the ratio of nonperformers to total assets rose only 4 basis points, to 0.29%.
Albert Savastano, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, upgraded the stocks of both Regions Financial Corp. and SunTrust Banks Inc. to "in line," from "underperform," saying the two companies would likely seek capital from the Treasury's bailout plan. Regions rose 2.6%, while SunTrust fell 1.5%.