European shares fall as banks dip after Italy downgrade
* FTSEurofirst 300 down 0.4 percent
* Fitch Italy downgrade hits banks
* Austere regulatory environment knocks UK lenders
* Norway's DNB lower on provision concerns
* Drugmaker Elan rallies on $1 bln share buyback
LONDON, March 11 (Reuters) - European stocks pulled back from more than four-year highs on Monday as banking shares tumbled after Italy's credit downgrade and due to potentially austere regulatory measures in the UK. points, or 0.4 percent, at 1,190.22. It had closed at 1,195.20 on Friday, a level not seen since September 2008 as the prospect of continued central bank support for the global financial system supported equities. Banks led the market slightly lower on Monday, dropping 1.4 percent. Italian lenders suffered the biggest falls after Fitch cut the country's credit rating and put it on negative outlook late on Friday after last month's inconclusive election. Pressure on Italian banks to increase provisions against bad debt could rise after the credit rating cut. "The downgrade in itself is limited to one notch, but the negative outlook means that, should the structural reform come to a stop and the recession deepen further, then more downgrades are in the pipeline," Nicola Marinelli, fund manager at Glendevon King Asset Management, said. "This could push some bonds into the high-yield rating category meaning that there could be a wave of forced sellers. Hence we wait for the chain reaction to unfold before build positions in the names/sector," he said. Spreads on weaker euro zone countries' bonds widened in the wake of the Italian downgrade. Italy's benchmark FTSEMIB share index, which is heavily weighted towards financial stocks, was down 0.8 percent. It has dipped 0.4 percent year-to-date, underperforming indexes of struggling southern European peers such as Spain, whose IBEX is up 5.6 percent in 2013. Goldman Sachs cut its estimates across the board for Italian banks as non-performing loans continue to rise and coverage ratios keep dropping, noting that the pressure to make provisions for bad loans is mounting. The pressure to increase reserves also weighed on Norway's top bank DNB, which fell 2.9 percent after the country's financial regulator said insurers needed to build up more reserves to reflect increasing life expectancy. It said they would need some 50 billion crowns ($8.72 billion) more than previously forecast.
EARNINGS RECOVERY DOUBT Hopes had been high for a big recovery in bank earnings in the coming 12 months as the industry gets to grips with the post-credit crisis austere landscape. Analysts forecast European banks' earnings will grow around 25 percent in the coming year, albeit from depressed levels, while European companies as a whole will average just 5.2 percent earnings growth, according to Thomson Reuters Starmine data. However, there was concern that new rules will further crimp UK lenders' ability to boost earnings after an influential panel of lawmakers said Britain's financial regulator should be given responsibility to decide how far banks can leverage their capital for investment and lending. Royal Bank of Scotland, Barclays and Lloyds Banking Group fell by up to 2.8 percent. Regulatory measures could potentially have a knock-on effect for interdealer brokers such as ICAP and Tullet Prebon , which each fell around 4 percent. UBS downgraded both firms to "sell", saying it expects structural pressures on banks could depress the trading volumes of intermediaries. Top individual movers in Europe were affected by analysts' rating changes. Accountancy software provider Sage shed 3.3 percent after BofA Merrill Lynch cut its rating to "underperform". Among standout gainers was Italian carmaker Fiat, which climbed 1.6 percent after Deutsche Bank raised its recommendation to "buy" from "hold" saying the firm's shares had been "overlooked and undervalued". Top riser was Irish drugmaker Elan, jumping 5.7 percent after it announced the pricing of a $1 billion share buyback.