Shares slide as implications give investors reason to fear

Lloyds Banking Group and Barclays shares tumbled to lows not seen since the tail end of the financial crisis yesterday as investors took fright at the implications of Europe's bank stress tests.

Lloyds was the biggest faller in the FTSE 100 index, dropping 7.5 per cent to its lowest since June 2009. Barclays fell by 7 per cent to a level last seen in April 2009.

Royal Bank of Scotland dropped 6 per cent and HSBC was down 1.5 per cent.

Lloyds appeared to emerge from last Friday's test results in good shape, with a healthy capital position and limited exposures to Europe's peripheral countries such as Greece and Portugal.

Its core capital ratio, which measures the strength of the loss buffer, was 7.7 per cent, second in Britain to HSBC's strong 8.5 per cent.

However, the test scenarios had a dramatic impact on Lloyds' profitability. More than €20bn of potential bad debts sent the bank from a €501m (£439m) predicted operating profit this year to a €12.4bn loss.

Though Barclays' post-test capital ratio appeared strong at 7.3 per cent, it had big exposures to peripheral Europe sovereign debt including €9.4bn to Italy and €8.8bn to Spain. Analysts at Citi also pointed out: "The increase in Barclays' assumed funding costs, at 276 per cent, is higher than any of other 90 banks that have been stressed."

RBS came out of the stress tests with the weakest predicted capital ratio at 6.3 per cent – above the 5 per cent pass hurdle but close enough to be seen as a near miss.

Morgan Stanley analysts said RBS would come under scrutiny but that the tests treated the bank severely and did not take account of the bank's continuing clean-up of its balance sheet.