Banking shares plummet on economic slowdown fears

Shares of large banks and other financial stocks were pummelled on Wall Street Monday as fears of a US economic slowdown heightened worries over deteriorating credit quality.

US banks were broadly lower, but the hardest-hit included Bank of America (Swiss: BAC.SW - news) , Citigroup (NYSE: C - news) , Goldman Sachs (NYSE: GS - news) and Morgan Stanley (Xetra: 885836 - news) , all down 6.0 percent or more in afternoon trade.

But the sector selloff extended to Europe as well, with German giant Deutsche Bank (Other OTC: DBAGF - news) plunging 9.5 percent and France's Societe Generale (Swiss: 519928.SW - news) dropping 6.1 percent, respectively.

A slowing economy translates into higher loan defaults, weaker credit quality and lower interest rates, all of which are bad for bank profits, said Jim Sinegal, an analyst of banks and payment companies at Morningstar (NasdaqGS: MORN - news) .

A bad economy also depresses capital markets activity, which is especially important to the earnings of Goldman Sachs and Morgan Stanley, he said.

"A broad down-day that's sort of reflective of overall economic fears is going to be amplified in bank shares," he said.

The losses came on a grim day for European and US stocks overall, with major indices in both regions off about 2.5 percent or more as US oil prices closed under $30 a barrel.

Investors also shed shares of payment companies. Credit card operators Visa (Xetra: A0NC7B - news) and Mastercard fell 6.8 percent and 3.3 percent. PayPal Holdings (LSE: 0R9U.L - news) lost 6.1 percent, while e-commerce payment company First Data sank 12.7 percent.

The oil slump is "driving economic fears in general," Sinegal said. "People are looking at the slide in energy prices as a symptom that the global economy is deteriorating."

Adding to the woes are the stream of poor earnings from European banks in recent days.

Amid the bleak European economic outlook and persistently low interest rates, the banks are facing "death by thousand cuts" from tougher regulations and capital rules, said UniCredit (EUREX: DE000A163206.EX - news) chief economist Erik Nielsen

Low equity prices could compel "the famous downward spiral" of banks being forced to raise more equity, necessitating more asset sales, Nielsen (EUREX: 11400372.EX - news) said in a client note Sunday. He said European policy makers must set boundaries to their plans.

"We need clarity ? and hopefully clarity that tells investors that the 'death by a thousand cuts' has been abandoned, and Europe is moving back to business," Nielsen said. "Without that long overdue clarity, one has to worry."

Sinegal added that the situation in European banks is not contained to their region, because of their links with the US financial sector.

"If the European banks run into trouble, do they have trouble paying off their debts to the US banks?" he said.