BENGALURU/NEW YORK (Aug 5): US bank stocks slumped on Monday as fears of a recession sent investors fleeing from a sector closely tied to the health of the economy and toward safe-haven assets.

Citigroup led big bank losses with a near 5% fall. Wells Fargo, Morgan Stanley and Goldman Sachs fell about 4% each, while JPMorgan Chase and Bank of America declined 2.7% and 3.5%, respectively.

Lenders typically feel the squeeze as recessions heighten concerns over credit losses due to higher unemployment, while loan demand - a key factor in profitability - also takes a beating.

"The economy is potentially slowing more than people appreciated, based on last week's economic data, that first and foremost is the biggest driver as it impacts loan growth, income growth, credit quality," said Jason Goldberg, banking analyst at Barclays.

Investors have been jittery since a crisis of confidence hit the sector last year, in part due to higher interest rates, and took down three major regional players.

Customers Bancorp's shares fell nearly 6%, while Huntington Bancshares dropped 4%. Banc of California, Citizens Financial, and US Bancorp declined between 3.2% and 4%.

The S&P 500 Banks Index, tracking a basket of large-cap bank stocks, was last down 3.3%, while the KBW Regional Banking Index fell 3.5%.

The US unemployment rate jumped to a near three-year high of 4.3% in July amid a significant slowdown in hiring, heightening fears the labour market was deteriorating and potentially making the economy vulnerable to a recession.

The economic weakness will likely seep into the sector's outlook after a mixed sector-quarter earnings season, where executives from top US banks remained divided over the Federal Reserve's future path on interest rate cuts and flagged deterioration in consumer health.

"This may be a few-day blip. I don't think anybody's ready to call this the beginning of a several-quarter downturn in the markets or the economy," said Stephen Biggar, banking analyst at Argus Research.

"High rates have kind of worn out their welcome, and at this point, lower rates would stimulate loan growth, and would also take some of the pressure off the deposit costs, and at the same time, help the economy avoid a downturn or recession," he added.

The S&P 500 Banks Index is down 7.2% month-to-date, compared with a 3.2% decline in the benchmark S&P 500, as of last close. The KBW Regional Banking Index has lost 7.6% over the same period.

  - Reuters