Bank shares stumbled again Wednesday, falling far behind the pace of other stocks amid investors' growing anxiety about higher interest rates.
The Standard & Poor's bank index slumped 1.56%, compared with lighter losses of 0.51% in the blue-chip Dow Jones industrial average and 0.21% in the broad-market S&P 500 index. Nasdaq banks slipped 0.44%.
"All you have to do is look at 30-year bond rates. They're over 6%, and people are getting nervous again," said Adam Lewis, senior vice president and trader at Keefe, Bruyette & Woods Inc.
In general, markets remain "jittery" about what the Fed will do at its two-day monetary policy meeting, beginning Tuesday, said Kevin Timmons, an analyst at First Albany Corp. "The assumption is that banks will be hurt by even a small rate increase."
"The economic reality is different," he insisted. "There would have to be a big increase or a series of increases to truly hurt banks' profits."
Tuesday's decision by Boston-based UST Corp. to sell to Citizens Financial Group puts new pressure on surrounding banks to bulk up or begin planning exit strategies, according to Cassandra Toroian, an analyst at Ryan, Beck & Co. of Livingston, N.J.
"It appears that banks in New England have a tough decision to make quickly," she said. "They must grow large enough to compete effectively with the biggest banks or exit the market."
She cited four banking companies-People's Bank of Bridgeport, Conn.; Brookline (Mass.) Bancorp; Seacoast Financial Services Corp. in New Bedford, Mass.; and Webster Financial Corp., in Waterbury Conn.-as ones that may feel compelled to make a move.
People's Bank was down 2.38%, at $30.75, on Wednesday. Brookline was up 0.55%, to $11.4375, and Seacoast 0.28%, to $11.0625. Webster fell 0.66%, to $28.875.
She said it was notable that UST Corp. opted to sell rather than see how the extensive branch office divestitures by Fleet Financial Group would pan out.
"We theorized that UST would prefer to wait and see the outcome before turning to an exit strategy," Ms. Toroian said. "The fact that the company chose to exit before the outcome of branch divestiture speaks volumes about the state of flux in the New England banking markets."
Elsewhere, shares of National City Corp. of Cleveland fell 1.125%, to $64.125, as Catherine L. Murray of J.P. Morgan Securities downgraded the stock to "market performer" from "buy."
Ms. Murray said it is becoming "increasingly unlikely" that National City will reach her earnings-per-share estimate of $4.75 for 1999 after two deal announcements this year.
Core operating results are coming in "slightly below" her higher expectations for the old National City and its newer markets, especially in Michigan, she said.