STOCKS NEWS EUROPE- Espirito Santo sees risk in banking report

Espirito Santo advises that the publication of a report on reform of the banks in Europe is "incrementally negative" for the sector.

The Liikanen report made its recommendation to the European Commission yesterday, proposing reforms such as the separation of riskier trading activities from other banking services, and more consistent risk weighting for real estate exposures.

"There will be some pressure on banks in the short term due to the unexpected recommendations for real estate credit portfolios," Banco Espirito Santo say in a note to clients.

It downgrades Deutsche Bank to "sell", whose shares are up 1.3 percent, albeit in light volumes of trading due to a public holiday in Germany.

Banco Espirito also sees the report as negative for SocGen , rated "sell", whose stock shed 0.4 percent in morning trading, and BNP Paribas , rated "neutral", whose shares gained 0.1 percent.

Michael Symonds, Credit Analyst at Daiwa Capital Markets, believes there will be a "lengthy and difficult process" before the recommendations are implemented.

"The Liikanen recommendations will no doubt set the foundation for future legislation," Symonds says.

"But European authorities already have their hands full finalising the legislative steps towards the creation a banking union"

Banco Espirito Santo concede that "there is no guarantee that they will be adopted in their full form."

"However, insofar that momentum is with the implementation of other onerous regulations such as Basel 3 and the UK's adoption of the Vickers recommendations, investors should be wary of the implications for the sector."

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