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Fearful investors desert bank shares

BANK SHARES fell sharply yesterday as the turmoil engulfing the US hedge fund, Long-Term Capital Management (LTCM), heightened investors' fears of a world banking crisis.

UK banking stocks have suffered heavy falls in the past two months, hit by worries over exposure to emerging markets, deterioration in the domestic economy and a gloomy global financial outlook.

They were dealt another blow yesterday when broker BT Alex.Brown slashed earnings forecasts for a number of blue-chip lenders, including Barclays, NatWest, Lloyds TSB and HSBC, owner of Midland Bank.

The downgrades triggered a wave of selling, with Barclays ending 6.8 per cent lower at 913p, NatWest closing 42.5p down at 845p, Lloyds 29p off at 661p and HSBC down 33p at 1,069p. Since the market's peak on 21 July, shares in Barclays have more than halved, while NatWest and Lloyds have plummeted nearly 30 per cent as investors deserted the sector. The sector index closed yesterday at its lowest for the year.

City analysts said that the crisis at LTCM was set to fuel worries of a worldwide shakeout in global financial markets and deepen the banks' plight.

Richard Coleman, banking analyst at Merrill Lynch, said: "There is clearly a danger of a systemic risk. This is why we are seeing concerted central bank intervention to bail out LTCM." He said further funds could be expected to follow suit. "LTCM is one of the largest and most highly leveraged, but it would clearly be surprising if there were no other funds in difficulty."

In its note, BT Alex.Brown's banking expert, Mark Eady, repeated his negative view on the sector. He said that the impact of global market risk, an increasing likelihood of rises in domestic bad debts and weak growth prospects for UK revenues would lower profits at British banks. He lowered his estimate for Barclays' 1999 earnings to pounds 2.83bn from pounds 2.98bn, with the 2000 forecast at pounds 2.25bn from pounds 2.95bn. For Lloyds, the 1999 estimate has been cut to pounds 3.61bn from pounds 4bn. NatWest's forecast is down from pounds 2.23bn to pounds 1.84bn.