Banks have been battered on Wall Street over concerns about the spread of Europe's debt crisis and another U.S. recession.
The beating that U.S. bank stocks have been taking eased up Thursday as markets surged upward, but they remain a magnet for worry over the health of the country's economy and financial system.
In the past five trading sessions, a benchmark index of 24 major banks, the KBW Bank Index (BKX), has fallen 8.9 percent. That outpaces the blue-chip Dow Jones industrial average, which is down about 2 percent. Year-to-date, the bank index is down about 26 percent; the Dow Jones down about 4 percent.
The local crop of publicly traded financial services companies hasn't fared much better. Even with Thursday's upturn, U.S. Bancorp shares dropped 7.1 percent over the last 5 days, while shares of Wells Fargo & Co. fell 5.6 percent, TCF Financial Corp. plummeted 15.3 percent, Ameriprise Financial Inc. dropped 7.7 percent and Piper Jaffray Cos. fell 11 percent.
"Beating seems to be an understatement," said Alan Villalon, senior research analyst in Minneapolis for Chicago-based Nuveen Asset Management.
Villalon said he thinks most of the bloodletting in bank sector stocks is related to fears over how exposed U.S. banks are to European debt. In the latest episode of the eurozone debt crisis, rumors spread about the health of Société Générale SA, prompting France's top banker to issue a statement Thursday saying the country's banks were solid.
"Everyone now is questioning the ability of the European Central Bank to ring-fence these issues," Villalon said. "People don't know what the total exposure is now to all of European sovereign debt and to the ... risk of doing business with those banks over there."
Kent Johnson, senior vice president and portfolio manager at Minneapolis-based Sit Investment Associates, said the rout in bank stocks is more about general fear of a double-dip recession. The direct exposure U.S. banks have to Europe is confined to major banks and is "minimal," Johnson said.
"People are afraid of what's out there in terms of the economy," said Sit's global chief investment officer, Roger Sit.
Wells Fargo Chief Financial Officer Timothy Sloan told analysts last month the bank has $3.2 billion of exposure to Portugal, Italy, Greece and Spain, most of it corporate loans and bonds and not sovereign debt. In a statement Thursday the bank said it has a "very strong capital position."
U.S. banks are generally in better shape than they were going in to Wall Street's 2008 meltdown when banks collapsed and the government intervened with a massive bailout. At the start of 2009, the median Tier 1 common ratio -- a key measure of bank strength -- for the 24 banks in the BKX index was 5.9 percent, according to analyst David Konrad at Keefe, Bruyette & Woods in New York. In the second quarter this year that was 10 percent. The higher, the better.
Investors are looking ahead to a slowing economy, however, that'll reduce demand for bank loans. Bank lending margins, which have largely been steady, are expected to start shrinking, as banks can't charge as much for loans when the economy falters, said Erik Oja, banking industry analyst at Standard & Poors Equity Research. Some people won't be able to afford higher rates, and wealthier customers will start shopping more aggressively for better terms.
There's also concern about bad commercial real state loans banks are still nursing on their books, Oja said.
"Nobody really knows the extent of 'pretend and extend,'" he said. "But it is pretty scary. It's in the back of everybody's mind."
Jennifer Bjorhus • 612-673-4683