By Jonathan Stempel
NEW YORK (Reuters) - U.S. bank shares suffered a rocky ride on Friday on fears that losses from bad loans will soar because of a deep global recession, and as a large, U.S. bank agreed to be acquired at a below-market price.
Carnage was particularly heavy among the biggest names, with shares of JPMorgan Chase & Co
The Standard & Poor's Financials Index <.GSPF> approached a 12-year low, eventually closing down 3.9 percent.
"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.
Credit losses at most major U.S. lenders are soaring, often to 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, causing more retail and business customers to 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
PNC said the purchase would make it the fifth-largest U.S. bank by deposits. The acquisition roughly doubles PNC's size.
In Friday trading, PNC shares closed up 3.5 percent at $58.88, while National City fell 24.7 percent to $2.07.
Among other companies, JPMorgan fell 6.4 percent to $35.43; Citigroup dropped 7.4 percent to $12.14; Bank of America, which is buying Merrill, shed 8.4 percent to $21.07; Goldman ended down 7.5 percent at $100.40; Merrill slid 9.4 percent to $15.86; and Morgan Stanley
CLEANING OUT THE SYSTEM
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.
Other banks fared better. Wachovia edged up 0.7 percent at $5.80, and Wells Fargo & Co
Meanwhile, shares of some regional banks that analysts consider relatively healthy, and potential acquirers of weaker rivals, rose. BB&T Corp
Minneapolis-based U.S. Bancorp had looked into buying National City, people familiar with the matter said on Friday.
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 & Co analysts downgraded Fifth Third to "sell" from "neutral," and Fitch Ratings lowered the bank's credit rating.
Fifth Third spokeswoman Debra DeCourcy declined to comment.
(Additional reporting by Paritosh Bansal, Joseph A. Giannone, Juan Lagorio and Dan Wilchins; editing by John Wallace/Jeffrey Benkoe/Tim Dobbyn)
