UPDATE 1-BofA, Citi shares down on Euro, U.S. worries

Fri Aug 5, 2011 5:49pm EDT

* BofA shares down 7.5 pct, Citi down about 4 pct

* KBW Bank Index off 2.2 percent (Updates stock prices; adds details on Citi and BofA exposures, analyst comment; rewrites throughout)

By Joe Rauch

CHARLOTTE, N.C., Aug 5 (Reuters) - The shares of Bank of America Corp (BAC.N) and Citigroup Inc (C.N), the major U.S. banks hit hardest by the financial crisis, dropped on Friday amid investors fears that global economic weakness will hamper their recovery.

The banks' shares performed worse than their broader sectors and Bank of America's shares closed at their lowest since April 2009.

Analysts said investors are selling off BofA and Citi shares because the banks are still struggling to become as profitable as rivals and could be hurt by the recent economic turmoil.

Bank of America could need to boost capital by $50 billion in the coming years, according to an estimate in June from Richard Staite of Atlantic Equities.

The bank is hoping it can earn enough money to make up for any capital shortfalls. But significant earnings could be tougher to come by if the economy is as sluggish as it has seemed recently, analysts said.

"It feels like the economic scenarios around the bank have gotten worse and for investors it feels like the risks are increasing," said Jefferson Harralson, a bank analyst with Keefe, Bruyette & Woods Inc.

Bank of America's shares have fallen more than 14 percent since Wednesday, while Citi's have fallen 10.25 percent. The broader market has fallen as well, but not as much -- the Standard & Poor's 500 index .SPX fell 4.8 percent over that period.

The broader market malaise caused BofA global wealth and investment management president Sallie Krawcheck and her top lieutenants to cancel late on Friday afternoon a teleconference with the media scheduled for Monday to discuss problems of affluent Americans.

Adding to Bank of America's difficulties, New York's attorney general said he will oppose the bank's $8.5 billion settlement with investors over toxic mortgage loans. [ID:nN1E773268]

"It makes you feel like the potential losses could be increasing again," Harralson said.

In a sign of the bank's eagerness to reach out to skittish investors, Bank of America's Chief Executive Officer, Brian Moynihan, agreed to be interviewed by fund manager Bruce Berkowitz next week, to talk about the bank's strategy.

Meanwhile, Citi has $22 billion in exposure to the countries at the center of the European debt crisis and extensive exposure to the eurozone as a whole.

BofA shares fell 7.48 percent to close at $8.17, their lowest close since April 2009, while Citi fell 3.94 percent to close at $33.44, their lowest level since February 2010.

In contrast, JPMorgan Chase & Co (JPM.N) shares were off 0.8 percent at $37.60 and Wells Fargo & Co (WFC.N) closed down 2 percent at $25.21. The KBW Bank Index .BKX was off 2.2 percent in its second consecutive day of losses.

LOW DIVIDENDS

Both banks, unlike their rivals, pay a quarterly dividend of a penny a share.

Analysts said investors are more likely to put their money into bank stocks with higher dividend payouts.

"Their lack of dividend, and (lack of potential) for growth here, is hurting them more," said Jason Ware, an equity analyst with Albion Financial Group.

Both BofA and Citi have struggled to match the profitability of JPMorgan and Wells Fargo, and are still saddled with billions in credit problems, or trying to sell under-performing divisions.

BofA recorded its largest quarterly loss in the company's history in the second quarter after it recorded $20 billion in charges related to buying back toxic mortgages. The charges included an $8.5 billion settlement with a group of investors over Countrywide Financial Corp-created mortgage bonds.

Some estimates have said BofA might need to raise as much as $50 billion in capital to absorb losses and meet new industry capital rules in the coming years.

BofA's executives have said they can raise additional capital through earnings, rather than an additional stock offering. (Reporting by Joe Rauch; editing by John Wallace and Andre Grenon)

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