BofA shares fall 26 percent; rest of sector also battered

NEW YORK (Reuters) - Bank of America Corp (BAC.N) sold $10 billion of shares on Tuesday after its stock price suffered its biggest ever one-day loss, and the bank's struggles to raise capital helped drag down other shares in the entire financial sector.

Making matters worse for financial stocks on Tuesday was the fear that the global economy's struggles may force other financial institutions to also try to raise capital in a weakening market.

Bank of America shares fell 26 percent on Tuesday, shaving nearly $40 billion off the bank's market value. The company was first listed on the New York Stock Exchange in 1979.

JPMorgan Chase & Co (JPM.N) and Citigroup Inc (C.N), its closest rivals, slumped 10 percent and just under 13 percent, respectively. The Dow Jones U.S. financial index .DJUSFN sank more than 10 percent.

Charlotte, North Carolina-based Bank of America reported a steeper-than-expected 68 percent fall in quarterly profit on Monday, cut its dividend in half and announced the plans to raise cash.

Some investors and analysts saw the timing of the move to raise capital as an attempt to beat rivals to the market while there is still an appetite for financial shares as the credit crunch intensifies.

"(Lower) earnings, cutting dividends, forecasting difficult times ahead -- I think that's going to be the mantra for most companies reporting, particularly in the financial area," said Robert Lutts, chief investment officer of Cabot Money Management in Salem, Massachusetts.

"These are the most difficult times for financial institutions that I have experienced in my 39 years in banking," Kenneth Lewis, chairman and chief executive of BofA said in a statement on Monday.

"It was a perfect storm kind of quarter," he said later in a conference call with analysts.

Last month, Goldman Sachs Group Inc (GS.N) sold $10 billion in securities, and Citigroup and Wells Fargo & Co (WFC.N), said they will raise capital if they succeed in their bids for Wachovia Corp WB.N.

"With such massive capital raises, we believe a 'sooner-is-better' mentality will prevail as far as capital raises and distinguish survivors and the more challenged among banks," wrote analyst Meredith Whitney at Oppenheimer & Co.

MARKET TIMING

After the market closed, a syndicate source told Reuters that Bank of America had sold 455 million shares at $22 each, a 7.4 percent discount to its already depressed closing price, managing to just raise $10 billion. Companies selling new shares often raise significantly more than expected, and Bank of America executives had said it was possible they would raise more than the targeted amount.

Bank of America and Merrill Lynch served as joint book-runners on the offering.

Shares of the bank slipped to $22.89 in after-hours trading, almost 5 percent lower.

Citigroup has already forecast a third-quarter loss, while quarterly results at top rivals such as JPMorgan remain a big question mark.

Analysts noted Bank of America's results showed credit quality weakening across most types of loans, and declines in both debt and credit card purchase volumes, which are also important businesses at Citi and JPMorgan.

"Bank of America is so large, it's such an industry bellwether, how can these other banks not be experiencing the same thing?" said David Dietze, chief investment officer at investment manager Point View Financial Services.

An additional concern for Bank of America is the financial health of Merrill Lynch, which it is set to buy next year.

Merrill is likely to post large write-downs from its fixed-income, currencies and commodities business this quarter, and its valuable wealth management business may also be starting to feel the pinch, according to Wachovia Capital Markets analyst Douglas Sipkin.

Trouble at the wealth management unit would not be a positive for Bank of America. Chief Executive Kenneth Lewis described the business as the "crown jewel" of the Merrill acquisition when the deal was announced last month.

Merrill is also facing a $5 billion call for collateral from JPMorgan, reported CNBC. According to the news network, Merrill is resisting the collateral request on 'principle' rather than because of liquidity concerns. A spokesman at JPMorgan and a spokeswoman for Merrill declined comment.

Bank of America shares fell $8.45 to $23.77 on the New York Stock Exchange. The shares have traded in a 52-week range of $52.95 to $18.44.

(Additional reporting by Juan Lagorio; Editing by Derek Caney, Lisa Von Ahn and Jeffrey Benkoe)