Citi selloff chills bank rally by Colin Barr @FortuneMagazine January 18, 2011, 5:51 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons Bank investors are getting hit with a wave of buyer’s remorse. Finance stocks tumbled Tuesday after Citigroup c posted a weak fourth quarter and Comerica cma agreed to purchase Sterling Bancshares sbib in a push to expand its reach in fast-growing Texas. Downer Citigroup tumbled 5% following the release of its fourth consecutive quarterly profit. CEO Vikram Pandit said the bank accomplished all it set out to in 2010. It earned $11 billion after two years of massive losses and shrank its troubled Citi Holdings portfolio. But investors sold the stock, which is up more than 40% over the past year, amid worries about the bank’s soft revenue. Not helping matters was Pandit’s admission that Citi, unlike other big banks such as JPMorgan Chase jpm , doesn’t expect to begin buying back shares or paying a larger dividend until next year. Some investors have been keeping their fingers crossed that Citi would begin buying back its stock to sop up some of the overhang from its 2008 federal bailout. Morgan Stanley analyst Betsy Graseck wrote in a note to clients Tuesday morning that a buyback is “critical” to pushing Citi’s returns above its cost of equity. But Pandit said in response to repeated queries on a Tuesday morning conference call that “we believe 2012 is the right year for us to begin returning capital to shareholders.” Citi shares fell as low as $4.83 after hitting a 52-week high of $5.15 Friday. The Comerica news should be good news for smaller banks, at least, as a long-awaited wave of banking mergers starts to take shape. The $936 million deal shows healthier small banks in attractive markets can expect to get bids as their bigger regional peers start to heal. The banks' big rally But Comerica shares tumbled 8% in trading Tuesday, in the latest case of investors rushing to sell the stock of an acquirer in what struck some as probably a pricey deal. While the merger “makes sense strategically, our first glance is that the deal is very fully priced,” wrote Citi analyst Keith Horowitz, who rates Comerica sell. Like Citi, Comerica stock had been on a roll, up 25% since Fed chief Ben Bernanke’s Aug. 27 speech outlining the Fed’s commitment to bringing down joblessness. The market reaction to the Comerica selloff echoed a deal that was announced a month ago. Bank of Montreal bmo saw its shares plunge after it announced a deal to buy troubled Marshall & Ilsley mi of Milwaukee. While Bank of Montreal shares have since clawed back about two-thirds of their announcement-day decline, the KBW banks index has climbed sharply since then, as analysts have started talking up the finance sector as a way to cash in on economic recovery (see chart, right). Among the major banks, Bank of America bac and Wells Fargo wfc were each down 2%. Each is scheduled to report fourth-quarter numbers this week. Many other big lenders were down around 1%.