NEW YORK Shares of several major U.S. banks suffered steep declines Monday as investors speculated that Wachovia Corp WB.N won't merge with Morgan Stanley (MS.N), while JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N) were downgraded.
In afternoon trading, Wachovia shares were down $3.90, or 21 percent, at $14.85; JPMorgan fell $6.08, or 13 percent, to $40.96, while Wells Fargo fell $5.26, or 13.2 percent, to $34.54.
The 24-member KBW Bank Index .BKX was down 10 percent in afternoon trading. It had risen 28.2 percent on Thursday and Friday combined, as the government announced a series of measures to calm financial markets and stabilize lenders, now including plans to buy as much as $700 billion of troubled assets.
"The sector got the adrenaline shot last week, and that's wearing off," said Michael Nix, who helps invest $750 million at Greenwood Capital Associates LLC in Greenwood, South Carolina. "The near-term outlook for financials still remains pretty difficult."
JPMorgan, Wachovia and Wells Fargo are respectively the third-, fourth- and fifth-largest U.S. banks by assets. Shares of larger banks Citigroup Inc (C.N) and Bank of America Corp (BAC.N) also fell as the broader market tanked.
Wachovia shares declined after Morgan Stanley won U.S. Federal Reserve approval to become a bank holding company, boosting its ability to attract deposits. Morgan Stanley also agreed to sell a possible $8.5 billion stake to Japan's Mitsubishi UFJ Financial Group Inc (8306.T).
Both moves increased the Wall Street bank's perceived ability to survive independently, without merging with a lender with a more stable funding base.
Wachovia Chief Executive Robert Steel is trying to shed non-core assets, cut 11,350 jobs and reduce annual costs by $1.5 billion as the bank manages a "distressed" $122 billion portfolio of option adjustable-rate mortgages. Even so, Wachovia shares more than doubled on Thursday and Friday.
Nix said not merging with Morgan Stanley could even be positive for Wachovia. "It will allow Robert Steel to focus on Wachovia and fix the franchise, without having to integrate a significant merger at the same time," he said.
Wachovia was also downgraded to "hold" from "buy" by Stifel Nicolaus & Co analyst Christopher Mutascio, who called the bank's recent share run-up "too much too soon."
Meanwhile, JPMorgan and Wells Fargo were downgraded by Sandler O'Neill & Partners LP analysts, who said their stock valuations already reflected the banks' positions as among the best-run and best-performing large banks in a tough credit environment.
Analyst Jeff Harte downgraded JPMorgan to "hold" from "buy," while Scott Siefers cut Wells Fargo to "sell" from "hold." Wells Fargo shares had hit a record high on Friday.
Wachovia is based in Charlotte, North Carolina; JPMorgan in New York, and Wells Fargo in San Francisco.
(Editing by Bernard Orr)