Bank of America Corp. (BAC) and Citigroup Inc. led U.S. lenders to their steepest drop in more than two years as the government’s loss of its AAA credit rating rippled through financial markets.
Bank of America, the nation’s largest bank by assets, plunged 20 percent and Citigroup slid 16 percent, leading the KBW Bank Index (BKX) down 11 percent. It was the worst showing for the 24-company benchmark since April 20, 2009, when Bank of America told investors it was putting aside more money to cover a growing pool of uncollectible loans.
Those costs have continued to erode investor confidence ever since for the lender and some of its biggest rivals. More pressure came last week after S&P downgraded the credit of the U.S. government, which guarantees some of their deposits and debt, to AA+. Bank of America’s shares sold for only a third of their book value today, and Citigroup’s price-to-book ratio fell to less than 50 percent.
“Investors are dumping financials because there’s so much confusion about what could be on their books,” Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore, said in an interview. “You’ve got a perfect storm against Bank of America.”
Bank of America slid $1.66 to $6.51 as of 4:15 p.m. in New York Stock Exchange composite trading. It was the biggest drop since April 2009, and left the stock shorn of half its value since the start of 2011. Citigroup fell $5.49 to $27.95, down 41 percent for this year, and sold for as little as $26.25, its largest decline since February 2009, when investors were speculating that lenders might be nationalized.
Credit-default swaps on Charlotte, North Carolina-based Bank of America soared to the highest since May 2009, as prices on contracts for U.S. banks including Morgan Stanley and Citigroup rose, according to data provider CMA. Bank of America’s contracts gained 88 basis points to 295 basis points as of 4:30 p.m.
The U.S. credit downgrade led to cuts in ratings at companies sponsored or backed by taxpayers, including Fannie Mae and Freddie Mac, the two mortgage finance firms seized by the government in 2008 to prevent their collapse. Both were lowered to AA+ because of their “direct reliance on the U.S. government,” the ratings firm said.
Among other U.S. lenders, New York-based JPMorgan Chase & Co. fell 9.4 percent, San Francisco-based Wells Fargo & Co. and U.S. Bancorp declined about 9 percent. Goldman Sachs Group Inc. declined 6 percent and Morgan Stanley dropped 14 percent. Capital One Financial Corp., Regions Financial Corp. and SunTrust Banks Inc. all lost more than 12 percent.
Before trading began, American International Group Inc. disclosed plans to sue Bank of America over faulty mortgages and analysts speculated the bank may need to raise capital.
AIG, the insurer rescued by U.S. bailouts during the 2008 financial crisis, contends Bank of America caused more than $10 billion in losses at the company, which had specialized in investments and insurance tied to mortgage bonds. Bank of America, which repaid its own government bailout in 2009, rejected the assertions of New York-based AIG.
The suit is the latest legal pressure faced by Brian Moynihan, 51, who took over as chief executive officer at the bank last year. Last month, investors including BlackRock Inc. sued Bank of America after opting out of a $624 million settlement tied to loans made by Countrywide Financial Corp., which the bank bought in 2008. Plaintiffs said the subprime lender misled shareholders about its finances and lending practices.
Bank of America shares have been dogged by concerns that mortgage expenses and a stagnating U.S. economy will crimp profit and force it to bolster capital by selling new shares. Moynihan has repeatedly said this year that the firm won’t need to issue common stock.
“The bias that exists, and that is gaining credibility, is that a double dip is ahead of us,” said Charles Peabody, an analyst at Portales Partners LLC. “If that’s the case, then something like Bank of America is going to have to raise substantial equity externally.” Peabody rates Bank of America a “buy,” and said he doesn’t think the firm will raise capital.
Mike Mayo, the Credit Agricole Securities USA analyst who said July 20 he didn’t foresee the need to raise funds, downgraded the stock today to “underperform” from “outperform” and said investors “can no longer rule out a capital raise.” Keith Horowitz at Citigroup reiterated his buy recommendation, saying there’s “significant value here” and that Bank of America doesn’t need to raise capital.
“Even as we have been building our reserves, we have improved our capital levels and our liquidity,” the bank said in a memo distributed to employees and dated Aug. 7. “Our tangible common equity ratio -- the most basic measure of capital strength -- has risen to 5.87 percent on June 30, 2011, from 5.05 percent on December 31, 2009, higher than JPMorgan Chase.”
As for the AIG case, the bank rejects the insurer’s “assertions and allegations,” said Larry DiRita, a spokesman for the lender, the biggest in the U.S. by assets.
“AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets,” DiRita said. “It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors.”
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