Updated from 3:18 p.m. EST with market close information.
NEW YORK ( TheStreet) -- Shares of most major U.S. banks tumbled on Friday, U.S. markets followed international markets down, on concern of a slowdown in emerging economies.
The Dow Jones Industrial Average
"Concerns about slower growth in China and less accommodative monetary policy in the U.S. are driving capital out of some EM countries, notably those with large current account deficits," wrote BMO Capital Markets economist Sal Guatieri in a note to clients early Friday.
Investor money was flowing into safe harbors, with the market yield on 10-year U.S. Treasury bonds down five basis points to 2.73%. The yield for the 10-year bond has dropped from 3.04% at the end of 2013.
The KBW Bank Index (I:BKX) was down 2.6% to 58.43, with all 24 index component stocks ending with significant declines. Big banks seeing big stock-drops included KeyCorp (KEY) of Cleveland, with shares down 5.5% to $12.93, despite the company's announcement Thursday of a 20.5% year-over-year increase in fourth-quarter earnings-per-share. KeyCorp was one of the strongest performing bank stocks during 2013, possibly explaining its high volatility on a brutal day in the market.
State Street (STT) of Boston was down 4.5% to $69.46, following a fourth-quarter earnings announcement that included GAAP earnings exceeding the consensus estimate but operating EPS below expectations, with Jefferies analyst Ken Usdin writing in a client note that the custody bank's "Guidance for 3%-5% rev. growth and positive operating leverage in '14 seems inline with consensus."
Shares of Morgan Stanley (MS) were down 3.7% to $30.45.
Citigroup (C) was down 2.7% to close at $49.33, after Atlantic Equities analyst Richard Staite downgraded the shares to "neutral" from "overweight." Staite in a note to clients wrote that rising interest rates were likely to put Citi's emerging markets loan business "under pressure."
A major exception among large banks on Friday was Discover Financial Services (DFS - Get Report), with shares rising 2.8% to $53.88, following an upbeat earnings report. The bank reported a 16% year-over-year increase in earnings-per-share, with a fourth-quarter return on equity of 22%. Discover also reported solid growth in average credit card loan balances, setting it apart from other major credit card lenders, with the exception of American Express (AXP), which also showed strong loan growth.
First Niagara Sinks nearly 12%
The big loser for the banking sector on Friday was First Niagara Financial Group (FNFG - Get Report) of Buffalo, N.Y., with shares down a whopping 11.9% to $9.10, after the bank in its guidance for 2014 said it expected opearating earnings-per-share for this year to be in a range of 72 cents to 75 cents, well below the consensus 2014 EPS estimate of 80 cents, among investors polled by Thomson Reuters.
First Niagara's decision to provide forward guidance is, of course, admirable, but extending the guidance to earnings-per-share is somewhat mystifying, because very few large banks do this.
The bank reported fourth-quarter net income available to common shareholders of $70.1 million, or 20 cents a share, which was in line with the consensus EPS estimate. Those results compared to net income available to common shareholders of $71.6 million, or 20 cents a share, in the third quarter, and $53.6 million, or 15 cents a share, during the fourth quarter of 2012, when the company booked a $16 million pre-tax amortization charge on its portfolio of collateralized mortgage obligations and $3.7 million in expenses associated with the disposal of some of the branches it had acquired from HSBC (HSBC).
The bank's net interest income rose to $280 million during the fourth quarter from $277.5 million the previous quarter and $252.3 million a year earlier, reflecting an expanding net interest margin, along with loan growth and a larger investment securities portfolio. The net interest margin widened to 3.41% in the fourth quarter from 3.40% the previous quarter and 3.22% a year earlier.
The bank's earnings were also boosted by a decline in noninterest expense to $227.2 million in the fourth quarter from $231.2 million in the third quarter and $266.5 million during the fourth quarter of 2012.
The company's earnings conference call on Friday was the first for CEO Gary Crosby after he was named permanent CEO in December. Crosby took over as interim CEO when John Koelmel abruptly resigned last March after leading First Niagara through multiple acquisitions that grew its total assets more than four-fold over five years.
Crosby on Friday said, "will accelerate our investments in the franchise to increase our value proposition over the long term."
"We need to accelerate our evolution from our thrift roots to a more robust commercial banking model. While we've been doing that we need to accelerate the pace of change and also change the way we deliver technology solutions to better position us for the future. While the acceleration of this evolution will weigh on near term profitability, the Board's priority is to deliver value to our shareholders over the long term."
"Now we'll be investing $200 million to $250 million over this three to four year period that will address our common rails initiative as well as other programs to drive revenue growth, sustainable operating leverage, ongoing regulatory compliance, and risk management," Crosby said.
That figure and a four-year wait during another transformation for the bank is likely what that scared-off investors on Friday, who had already suffered through so many years of underperformance during the massive expansion by Koelmel, which was funded in part by dilutive common-equity raises.
"This investment strategy has to be undertaken at some point and the sooner we do it, the better. Otherwise, you risk falling further behind and you find yourself saddled with a lot more integration costs and a lot more integration risk relative to technology," Crosby said in response to an analyst who asked about the timing of the investment strategy, in light of investor disappointment
According to a transcript provided by Thomson Reuters, Citigroup analyst Josh Levin asked, "why should shareholders wait three to four years for you to build out the infrastructure when an acquirer could buy the bank and they have the infrastructure already and they could put you on their platform and they could integrate you with a considerably shorter time than three to four years?"
Crosby responded, "we believe we can best increase shareholder value by mining that potential through staying an independent company. And arguably... you've really got to ask yourself do the buyers really have the infrastructure and is that infrastructure as far along as we're intending to be in the near term -- in the longer term? That's the real question."
The following chart shows the dramatic -- traumatic for long term investors -- underperformance of First Niagara Financial Group against the KBW Bank Index and the S&P 500 since the end of 2011:
data by YCharts
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