10-7-13 10:31 AM EDT | Email Article

By Christina Rexrode


NEW YORK (MarketWatch) -- Financial stocks slipped Monday morning. Investors are preparing for a third-quarter earnings season that probably no one will describe as "blockbuster," and the government's plodding shutdown didn't exactly help.


The Financial Select Sector Fund (XLF) slipped 1%. Citigroup Inc. (C) and Wells Fargo & Co. (WFC) were each down more than 1%.


When the shutdown started last week, bank stocks trudged along. The Standard & Poor's 500 financial index was essentially flat for the week, down 0.04%. But in a note Monday morning, KBW analyst Frederick Cannon warned that the repo market, a source of short-term loans, could be the first shoe to drop. A prolonged shutdown and debt ceiling debate, Cannon said, "would have extremely negative consequences for other financial markets and the real economy," and the repo market did show stress during the debt ceiling debate, round 1, in 2011. In other words, Cannon said -- when repos start to sell off, time to rethink how much you should be putting in bank stocks.


Big banks begin releasing third-quarter earnings results on Friday, when Wells Fargo and J.P. Morgan Chase & Co. (JPM) kick things off. Analysts have been slashing their earnings predictions for many of the banks, citing a slowdown in mortgages and fixed-income trading.


Weekly loan data released by the Federal Reserve late Friday also failed to soothe nerves about the upcoming earnings season. KBW analyst Brian Klock noted that, except for credit card balances, the banking industry's loan growth was weak across all segments during the last full week of September. For the entire quarter, though, the small domestic banks have fared better than the big ones for loan growth, Klock said.


But regional banks are hardly immune. Fifth Third Bancorp (FITB) slipped 1.4% after Raymond James analyst David Long said that the industrywide slowdown in mortgage lending will be especially hard on the Cincinnati-based bank. That's because mortgage banking income accounted for a sizable 13% of revenue last quarter, according to Long.

-Christina Rexrode; 415-439-6400; AskNewswires@dowjones.com


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10-07-13 1031ET

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