Bank shares sink to 1996 levels on loss fears

By Jonathan Stempel

NEW YORK (Reuters) - U.S. bank shares fell to their lowest level since 1996 on fears of greater credit losses for an already battered sector.

The 24-member KBW Bank Index .BKX, consisting mainly of the biggest U.S. banks, fell as much as 7 percent on Tuesday.

They closed down 3.1 percent, recovering some losses after Federal Reserve Chairman Ben Bernanke affirmed that helping financial markets return to normal functioning was a top priority for the central bank.

Among large U.S. banking companies, shares of Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) fell 4.3 percent, Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz) slid 8.1 percent, Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) fell 7.7 percent, and even JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz), considered among the healthiest big banks, dipped 2.1 percent.

"Skepticism remains related to all the credit issues," said Alan Gayle, senior investment strategist at Trusco Capital Management in Atlanta.

More negative news came from Minneapolis-based U.S. Bancorp (USB.N: Quote, Profile, Research, Stock Buzz), which said credit losses contributed to a surprisingly large 18 percent drop in second-quarter profit.

The sixth-largest U.S. bank tripled the sum it set aside for bad loans, largely because of the declining housing market, amid what Chief Executive Richard Davis called a "challenging and stressful" economic environment.

Its shares closed down 2.7 percent, despite enjoying a brief rally after Davis said he intended to raise the bank's dividend.