Sobering World Bank Report Spooks Investors

Financial stocks closed at an eight-week low on Monday after a global economic report served as a reality check on sentiments that the banking industry is rebounding.

The KBW Bank Index fell 6.65%, to 34.84, its lowest close since May 1, when it closed at 32.13.

Banking shares fell after the World Bank projected that gross domestic product in developing countries will grow a dismal 1.2% this year, down from a 5.9% gain 2008.

Walter "Bucky" Hellwig, a senior vice president at the Morgan Asset Management unit of Regions Financial Corp., said slower economic growth means banks will have to raise more capital to backstop mounting loan losses.

"It points to more credit-quality issues and asset-valuation problems," Hellwig said. "It raises the red flag that we might not be out of the economic wilderness."

Stifel, Nicolaus & Co.'s banking analysts wrote in a research note on Monday that banking stocks may have gone too far too fast in rallying since March.

"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," the analysts wrote.

Banking stocks led a sell-off across the entire market, and other financially sensitive sectors, such as energy and insurance, also fell. The Dow Jones industrial average fell 2.35% and the Standard & Poor's 500 index fell 3.06%.

Many of the largest banking companies had their worst trading day in weeks. Bank of America Corp. fell 9.68%, Wells Fargo & Co. fell 6.95% and JPMorgan Chase & Co. fell 6.09%. Citigroup Inc. fell 17 cents, to $3 a share, its lowest closing price since May 1.

Regional banking companies suffered as well. Huntington Bancshares Inc. fell 9.47%, KeyCorp fell 9.39%, Capital One Financial Corp., fell 8.42%, Fifth Third Bancorp fell 8.04%, SunTrust Banks Inc. fell 7.87% and Regions fell 7.02%.

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