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European Banking Stocks Tumble on Credit Concerns

Reuters
Monday, 5 Nov 2007 | 10:26 AM ET

Shares in Europe's banks fell for a third straight day on Monday, battered by fears over their exposure to big losses after the head of Citigroup resigned and the U.S. bank warned it might write off another $11 billion.

By 1440 GMT the DJ Stoxx European banking index, which tracks European bank stocks, was down 2.4 percent.

The biggest losers included Britain's Barclays, down 4.3 percent at 515 pence after dipping below 500p for the first time in over three years. Royal Bank of Scotland fell 3.8 percent to 457.5p after hitting its lowest level since March 2003.

"Things could get worse in our view," Jonathan Pierce, analyst at Credit Suisse, said of UK banks. "It seems increasingly likely to us that recent events could escalate into a full blown financial crisis. The issue is one of confidence."

Deutsche Bank was trading down 2.7 percent, touching its lowest level in almost 15 months. Swiss banks were also hit, with shares in UBS falling 4.4 percent and Credit Suisse down 3 percent.

Pierce said in a note that banks needed to provide more detail about their balance sheets, as the market is being cautious and assuming losses are being shielded from many of the mark-to-markets seen at U.S. broker dealers.

Citigroup Sparks Selloff

The latest drop was sparked by news that Citigroup may write off $11 billion of subprime mortgage losses, on top of a $6.5 billion write-down last quarter.

A greater concern than possible write-offs is the impact on future growth, some analysts said.

The credit squeeze will mark "an important inflection point" for fixed income markets and UK domestic mortgages, according to bank analysts at HSBC.

They said revenue from high growth areas such as structured products will be hit by a move to safer and simpler products, which will significantly dent future profit growth for Barclays.

Citigroup's warning was accompanied by news its chairman Charles Prince will be replaced by Robert Rubin, the former U.S. Treasury Secretary who was on the bank's board.

Prince's departure was not a surprise, but the size of the write-down and the speed of deterioration of banks' exposure to U.S. housing losses has alarmed investors that more bad news will emerge across the sector. Citigroup shares fell 4 percent in early U.S. trading.

It came less than a week after Merrill Lynch ousted its chief executive following an $8.4 billion write-down.

Persistent Fears

Investors remain jittery about the exposure of banks, particularly those with strong investment banking arms, to the credit market turmoil that has battered financial markets, increasing borrowing costs and drying up liquidity.

Barclays has tumbled 15 percent since Wednesday's close and RBS shares have shed 11 percent, reflecting their greater exposure to capital markets than their domestic rivals.

Shares in smaller rival Alliance & Leicester were down 7 percent as worries persist that it could face funding problems, while Bradford & Bingley lost 5 percent.

But David Cumming, head of UK equities at Standard Life, one of the biggest FTSE investors, said the sell-off in banks appeared to be an over-reaction, citing prospective yields in the sector of over 6 percent.

"I think it's really fear over logic ... a lot of people have lost their nerve," Cumming said.

Outside the UK, Anglo Irish dropped 4 percent and French banks, hit by a downgrade for Societe Generale from Bear Stearns, were also trading lower. SocGen and BNP Paribas were both down over 3 percent.

Bear Stearns said on French banks: "We believe the outlook for the banks' derivatives, structured finance and proprietary trading businesses has deteriorated, and have reduced our forecast (corporate and investment banking) revenues by approximately 7 percent in 2009."

In the credit market, the cost of insuring the debt of financial groups against default also rose.

Five-year senior credit default swaps for RBS were trading three basis points wider at 59bp, meaning it costs 59,000 euros a year to insure 10 million of debt against default. Barclays CDS were seen at 64 basis points, also three basis points wider.

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