Stocks of capital markets-sensitive banking companies and those whose businesses have been directly affected by last weeks attacks plunged in the first day of stock trading since the markets were closed Sept. 11.
At the same time, shares in some financial companies expected to benefit from the Federal Reserve Boards pre-trading rate cut particularly the largest thrift companies remained steady or gained ground.
Theres a flight to quality, away from New York City-based banks to interest rate-sensitive ones that will benefit from the steepening yield curve, said Andrew Collins, a bank analyst at U.S. Bancorp Piper Jaffray.
Shares in Bank of New York Co. had dropped 8% by midday, to $34.15 a share. The company, whose headquarters are located in lower Manhattan, last week ran into problems with its ATM and securities clearing operations after some of its communications systems stalled.
The company, which has moved its securities clearing staff to locations in New Jersey, said in a press statement Friday evening that virtually all of its systems are up and running.
But concern that Bank of New York would incur trading losses because of systems failures in its securities clearing operation caused a selloff of its stock, Mr. Collins said.
Other banking companies with large securities clearing operations also fell Monday. Pittsburgh-based Mellon Financial Corp.s stock was down 3%, to $32.61, and Boston-based State Street Corp.s stock had dropped 6%, to $42.46 in afternoon trading. Shares of Citigroup Inc., which said Monday that the combination of insurance claims and the closure of the stock exchange and a number of its branches would shave 12 to 14 cents per share off its third-quarter earnings, had dropped 6%, to $39.90 by midday.
The New York-based J.P. Morgan Chase & Co., which also has large capital markets operations, had fallen 6% to $35.21.
Meanwhile, the stocks of companies with large mortage operations held steady or actually rose by midday Tuesday. Seattle-based Washington Mutual Inc., the nations top mortgage originator, had gained 3%, to $36.15.
Benefits for earnings from the Feds easing would outweigh risks from higher credit costs if they develop at the large thrift companies, said Jonathan E. Gray, an analyst at Sanford C. Bernstein & Co. San Francisco-based Wells Fargo & Co., another big mortgage lender, had risen 2%, to $43.56.
Still, the Feds 50-basis-point cut could not assuage some investors concern that a new round of bad loans could hit the largest commercial and consumer lenders if weakening consumer confidence tips the United States into a recession, as some economists fear.
Investors in regional banking companies are asking: How much has their risk profile, in relation to a downturn in the economy, changed? said David Stumpf, a bank analyst with A.G. Edwards & Sons Inc.
Among the regional banking companies, the Chicago-based Bank One Corp. was one of the most affected by investor concern over future credit problems. Its stock had dropped 7%, to $31.03 in afternoon trading. Shares of companies with large credit card portfolios were also plunging. By midday Providian Financial Corp. had dropped by 19%, and American Express Cos. by 16%.