Bank shares sink; investors fear more losses

NEW YORK (Reuters) - U.S. bank shares sank on Tuesday, with Citigroup and Bank of America hitting their lowest levels since the early 1990s, after State Street Corp said it needs to raise capital and Royal Bank of Scotland posted the biggest loss in UK corporate history.

Shares of State Street , the world's biggest money manager for institutions, lost half their value after the company reported rising unrealized losses in its commercial paper program and investment portfolio, and said it could need to raise capital. Shares of State Street and other trust banks, which had been seen as the one safe type of bank for investors, reached their lowest levels in more than a decade.

J.P.Morgan Chase & Co shares fell more than 10 percent after Fox-Pitt analysts cut their earnings outlook on the second-largest U.S. bank. The analysts said JPMorgan, which has dealt with the credit crunch better than its peers, was not immune to a deteriorating environment.

Citigroup stock fell briefly below the level it reached in November, when the U.S. government rescued the bank with an injection of $20 billion and a backstop on toxic assets. Bank of America Corp stock fell to its lowest level in 18 years.

The KBW Bank Index <.BKX> plummeted 11.88 percent. The index has fallen 36 percent this month.

"We have got a crippled financial sector, not only in the U.S. but across the globe," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management. "We thought 2008 was bad. I think 2009 is going to be a continuation of that whole song."

On Monday, RBS said it was on course to report a 2008 loss of up to 28 billion pounds ($41 billion) after suffering hits from bad debts, while Britain threw its troubled banks another multibillion-pound lifeline -- the second since October -- and gave its central bank the green light to pump cash into the ailing economy.

Underscoring the dire state of the world economy, Japan reported consumer confidence plunging to a record low last month in yet another sign of deepening recession.

Regions Financial Corp , a large U.S. Southeast regional bank, on Tuesday reported an unexpected $6 billion charge to write down parts of its banking business, bringing its fourth-quarter loss to $6.22 billion.

Bank stocks rallied in December but fell under renewed pressure last week, when Bank of America posted its first quarterly loss in 17 years and Citigroup reported its fifth straight quarterly loss.

"We were expecting bad news, but maybe later in the year, not right out of the gates," Wirtz said.

Bank of America secured a second round of government aid to help the largest U.S. bank absorb its purchase of troubled brokerage Merrill Lynch & Co., and Citigroup said it would split into two units and shed troubled assets.

Bank of America shares fell 16.57 percent to $6.00 in early trading on the New York Stock Exchange, while J.P. Morgan stock was down 11.17 percent to $20.26. Wells Fargo shares lost 16.27 percent to $15.73, hitting their lowest level since March 2000.

State Street shares sank 50 percent to $18.06, while its peer Bank of New York Mellon , fell 26.3 percent to $16.90.

"Most are buying puts speculating on more losses for many of these (financial firms) or have been short sellers of the stock," said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.

(Additional reporting by Elinor Comlay in New York and Doris Frankel in Chicago)

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