- The Washington Times - Thursday, March 19, 2009

NEW YORK (AP) - Financial firms, which helped lead the recent rally on Wall Street, retreated Thursday as investors looked to pocket some gains on the recent surge in share prices and amid continued concern about the struggling economy.

“We had a massive run, so absolutely” there was some profit taking Thursday, said Scott Valentin, an analyst at Friedman, Billings, Ramsey & Co.

Bank stocks have been at the heart of the market rally over the past two weeks. Since the beginning of last week, the KBW Bank Index, which tracks 24 of the nation’s largest banks, jumped 62 percent. It gave back some of those gains Thursday, falling about 7.6 percent in afternoon trading.

Broader stock indexes also declined. The Dow Jones industrial average slipped 1.3 percent, while the Standard & Poor’s 500 index dropped 1.2 percent.

Citigroup Inc. and Bank of America Corp., which have been among the hardest hit by the financial turmoil, had led the recent rally. Last week, both Citigroup and Bank of America said they operated at a profit during the first two months of the year. That was an encouraging sign for two banks that have received a combined $90 billion in government bailout funds and additional protection against losses on hundreds of billions of dollars of risky loans and investments.

The pair were unable to sustain their momentum Thursday. Shares of New York-based Citi declined 29 cents, or 9.4 percent, to $2.79. Shares of Charlotte, N.C.-based Bank of America fell 53 cents, or 6.9 percent, to $7.14.

Valentin said there are general concerns about continued weakness in the economy, which could be putting pressure on the sector. The Federal Reserve announced Wednesday that it planned to pump more than $1 trillion into the economy to help boost the struggling housing market. A day removed from the announcement, Valentin said investors are now wondering what will happen if that is not enough money, which might be rattling investors a little.

Uncertainty about potential effects from inflation as more money is put into the economy also has investors a bit concerned, Valentin noted.

Evidence of continued weakness in the economy remains abundant. Nearly all lenders across most loan types are still facing rising defaults and loan losses, as unemployment creeps higher and more customers fall behind on payments.

“There’s still a lot of headwinds in the marketplace,” said Eric Savitch, an executive vice president and associate director of trading at Keefe, Bruyette & Woods Inc. Financial firms are still likely facing additional write-downs on their risky investments, Savitch noted.

Credit card lender Discover Financial Services said it would have posted a quarterly loss for the three months ended Feb. 28 had it not been for money from a legal settlement.

The Riverwoods, Ill.-based company more than doubled its provision for loans losses during its fiscal first quarter, to $1.3 billion. The company’s charge-off rate, the percentage of debt it does not expect to be repaid, climbed to 6.48 percent from 5.48 percent in the fourth quarter.

Citi Investment Research analyst Donald Fandetti wrote in a research note, “The (first quarter) results were weaker-than-expected, but expectations for credit-card companies are low.” He maintained a “Hold” rating on the stock.

It also reduced its dividend to 2 cents per share from 6 cents per share to help conserve capital. Shares of Discover Financial fell 70 cents, or 9.7 percent, to $6.54.

Elsewhere among credit card lenders, shares of American Express Co. dropped 81 cents, or 5.8 percent, to $13.28.

Credit ratings agency Standard & Poor’s placed American Express’ ratings on review for possible downgrade. S&P; said the review will take place because of escalating credit quality deterioration lenders are facing amid the broad economic weakness.

Most insurers were struggling Thursday as well, led by a sharp decline in life insurer Prudential Financial Inc., which saw its key financial strength rating cut two notches by Moody’s Investors Service after the market closed Wednesday.

Prudential shares tumbled $4.58, or 18.4 percent, to $20.34.

Shares of other life insurers fell as well, including MetLife Inc., which tumbled $2.47, or 9.7 percent, to $23.09. Hartford Financial Services Group Inc. shares tumbled 51 cents, or 5.8 percent, to $8.35.

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