Banking shares started the week down on renewed fears of more bad news, as Societe Generale's shares were downgraded by Citigroup to "sell" from "buy" because of the bank's massive trader fraud news.
The bank's 5.5 billion-euro ($8 billion) rights issue to make up for the 4.9 billion euros fraud losses "is set to come at a deep discount, diluting earnings," Citigroup analyst Kimon Kalamboussis wrote in a market note.
Societe Generale's shares plunged 7 percent while the European banking sector fell nearly 2.5 percent.
"I suppose some more negative things will come out (from the banking sector)," Engel said. "Definitely, that is to be expected."
"I don't think it will be over in the summer," Engel added.
Buying in the East
Previously, analysts were forecasting the extent of the European banking sector's exposure to the U.S. subprime crisis would be fully known after banks reported results for the fourth quarter.
Since the crisis started, the companies in the U.S. financial sector, including insurance companies, banks and financial services companies have lost around $700 billion from their market capitalization, Engel said.
In Europe, the fall in stock prices is likely to continue as more bad news emerges from banks and Engel said the biggest banks are the most likely to suffer as they have the most exposure.
Investors should stay away fromstocks of big banks such as Barclays, Credit Suisse, UBS or Deutsche Bank because they did not seek to grow outside their regions and rely on financial innovations for profits, he warned.
The more established a company, the more likely it is to be open to "creative" ideas like collateral debt obligations, Engel said.
The banks that did not fall prey to repackaging schemes in search for a few more basis points in returns from mature markets -- but instead focused on growth in young, emerging markets -- are the ones to look for.
"Companies that expanded to Eastern Europe did not think in terms of basis points," Engel said.
Among European financial stocks, he recommends Raiffeisen International, an Austrian bank which has branches in 16 countries in Central and Eastern Europe and has seen its profits soaring in the past years in the fast-growing region.
Austria's largest insurer Wiener Stadtische, with 20 million customers in 20 countries in the region, could also be an attractive buy, as well as the world's largest insurer Allianz, which has an extended presence in Central and Eastern Europe too.
Another bright spot in Europe's bleak banking sector is Hungary's OTP bank, which has bought banks in neighbouring Romania, in Bulgaria, Russia, Serbia and Montenegro.
Greek and Turkish banks are also present in the region, where foreign investment and rising living standards have helped financial institutions get record profits.