By Jonathan Stempel
NEW YORK (Reuters) - U.S. bank shares tumbled on Friday on fears that losses from bad loans will soar due to a deep global recession, and as a large, ailing U.S. bank agreed to be acquired at a below-market price.
The Standard & Poor's Financials Index <.GSPF> fell as much as 6.7 percent and neared a 12-year low, with carnage among the biggest names, including JPMorgan Chase & Co
"Credit quality will continue to deteriorate -- mortgage loans, credit card loans, auto loans, student loans, across the board," said Keith Davis, an analyst at Farr, Miller & Washington in Washington, D.C. "Many of these banks are going to be reporting losses for several quarters."
National City Corp
DIFFICULT ENVIRONMENT
Banks worldwide are trying to reduce their balance sheet risk after taking on too many mortgages and complex debt, which no longer have buyers.
Most major U.S. lenders said this month that credit losses are soaring, and often three times or more than year-ago levels.
The losses are likely to rise if housing prices fall further, unemployment rises, and the economy deteriorates to a point that retail and business customers have trouble paying their bills.
"This is a difficult environment," PNC Chief Executive James Rohr said on a conference call. "The economy has been deteriorating quarter by quarter."
PNC's all-stock transaction valued National City at $2.23 per share, 19 percent below where it closed on Thursday and 94 percent below where it traded in March 2007.
National City, which had lost money in five straight quarters, joins Bear Stearns Cos, Merrill Lynch & Co Inc
PNC said the purchase would make it the fifth-largest U.S. bank by deposits. The acquisition roughly doubles PNC's size.
BROAD DECLINE
In early afternoon trading, PNC shares rose 4 percent to $59.18, while National City fell 23 percent to $2.11.
On the New York Stock Exchange, JPMorgan declined 6.6 percent to $35.35; Citigroup dropped 6.6 percent to $12.25; Bank of America, which is buying Merrill, shed 8 percent to $21.17; and Goldman was off 9 percent to $98.82.
Merrill fell 8 percent to $16.06; Morgan Stanley
The selling is "part and parcel of the eventual cleanout" of leverage in the financial system, said Marshall Front, chairman of Front Barnett Associates LLC in Chicago.
"We are aware of hedge funds that are being forced to sell, and banks are forcing customers to bring margins up. Mutual funds are getting large redemptions, and exchange traders are under extreme pressure," he added.
One of Friday's biggest decliners was Fifth Third Bancorp
The Cincinnati-based lender has also struggled with mounting loan losses, and had been thought to be a potential takeover target, perhaps by PNC. Goldman Sachs analysts downgraded Fifth Third to "sell" from "neutral."
Fifth Third spokeswoman Debra DeCourcy declined to comment.
(Additional reporting by Joseph A. Giannone, Juan Lagorio and Dan Wilchins; editing by John Wallace/Jeffrey Benkoe)
